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Nicholas Laboratories, LLC v. Chen – No Indemnification for Action Against Employee

On Behalf of | Oct 12, 2011 | in Uncategorized

Nicholas employed Chen from late 2004 to early 2007. In June 2007, Nicholas filed a complaint against Chen stating multiple causes of action related to alleged breaches of contract and torts committed by Chen during his term of employment. After answering and filing a cross-complaint for indemnity, in an interesting role reversal of the typical case where an employer moves to compel arbitration, ex-employee Christopher Chen file a motion to compel arbitration.

In the first of two visits to the court of Appeal, Chen challenged the trial court’s denial of his petition to compel contractual arbitration against his ex-employer. The trial court found Chen did not meet his statutory burden (provide enough evidence) of establishing the existence of a written arbitration agreement between the parties. (Code Civ. Proc., § 1281.2.) Chen failed to attach the alleged agreement to his petition, instead relying on a declaration claiming he recalled signing a document with a broad arbitration agreement covering all disputes. Because the trial court, as the trier of fact, was entitled to find Chen did not meet his burden of establishing the existence of an arbitration agreement, the Court of Appeal affirmed, leaving each side to bear its own costs. The case moved forward with the trial Court.


On the eve of trial, the parties filed a stipulation premised on the following facts: “WHEREAS, Nicholas Lab[s] has decided to dismiss its Complaint without prejudice, if Chen decides to submit his Cross-Complaint for disposition pursuant to written submission to and decision by the Court; [¶] WHEREAS, Chen has decided to submit his Cross-Complaint for disposition pursuant to written submission to and decision by the Court, exclusive of a jury and without the presentation of live testimony.” The parties stipulated: (1) Nicholas Labs “will dismiss its Complaint without prejudice pursuant to the Request for Dismissal attached hereto”; (2) “Chen will submit his Cross-Complaint” for a bench trial based on written submissions; and (3) “This stipulation is not a resolution of a disputed claim. [Nicholas Labs] has determined to dismiss the action for its own reasons, and [Chen] has determined to submit the cross-complaint in writing to the court for [his] own reasons.” The stipulation was accompanied by a request for dismissal of Nicholas Labs‟ complaint, “without prejudice.”

During the bench trial, the Court found insufficient evidence of direction and control of Chen’s services by NS Holdings, LLC, and that Chen’s salary was paid by [Nicholas Labs] and not NS Holdings, LLC. There court found there was insufficient evidence that Chen was an employee in an enterprise in which he was “subject to the control of both Nicholas Labs and NS Holdings rendering him a joint employee of both entities.”

The trial court entered judgment: (1) for Chen and against Nicholas Labs on the complaint; and (2) for Nicholas Labs and against Chen on the cross-complaint. The court awarded Chen his costs on the complaint and awarded Nicholas Labs its costs on the cross-complaint. Chen then moved for attorney fees under section 2802.

Citing statutory authority (§ 2802, subd. (a); Corp. Code, § 317, subd. (d)) and the Nicholas Labs operating agreement, Chen claimed Nicholas Labs was obligated to “indemnify” Chen for the attorney fees he incurred in this action (both to defend against the complaint and pursue the cross-complaint for indemnification). The Court of appeal rejected this contention and held that plaintiff Nicholas Labs was not required to “indemnify” its ex-employee for attorney fees incurred by Chen during his successful defense of an action brought by Nicholas Labs. The court of appeal, Fourth Appellate District, Division 3, upheld the trial court and rejected Chen’s assertion that Labor Code § 2802(a) or Corporations Code § 317(d) and/or contractual indemnity provisions obligated Nicholas Labs to reimburse Chen.

The Court held that Labor Code section 2802 does not require an employer to reimburse its employee for attorney fees incurred in the employee’s successful defense of the employer’s action against the employee. The Court also concluded that Corporations Code section 317 has no application to limited liability companies. Unlike the first appeal, the Court awarded its costs to Nicholas Labs.

Normally California employers are required to reimburse employees for costs and expenses incurred in the discharge of their employment. In some cases for lawsuits brought against the employee in the course and scope of their employment. Every case turns on its facts. For more information on seeking reimbursement of expenses and whether you have a potential claim please contact Quintilone & Associates at .