Key employees who leave one firm to join a rival often have their attorneys' fees paid for by the new employer. Agreements to indemnify an employee for fees are sometimes contained in a negotiated new employment contract as a material inducement for the employee to defect and join a competitor. Indeed, many employees on the fence may not leave without some security that litigation will be financed by the new employer, which - to be sure - is in a better position to provide for and fund a legal defense.
Indemnification arrangements, however, are fully discoverable in litigation. A plaintiff's first discovery request almost always will include a demand for any employment agreements the defendant has signed in connection with his competing job. Also discoverable are facts related to fees paid by the new employer for a new employee. In a case where the employee does not have a written indemnification agreement, a plaintiff may seek and obtain discovery from the new employer about whether it has paid for the employee's legal fees.
This discovery even may extend not just to the fact of payment, but also the amount and the description of legal services performed. As a recent federal district court case held, records revealing "the general nature of legal work performed are not within the attorney-client privilege" because they do not contain confidential communications.
That is not to say all fee sheets are fully discoverable. For attorneys whose time entries are more detailed and may suggest the type of communication between the attorney and the client, a court certainly has the discretion and ability to cloak time entries with a privilege. But it is a mistake for counsel to assume that all fee sheets are privileged. They're not, even if the time entries generally describe the nature of the work performed and suggest what an attorney and a client may be discussing.
Aside from privilege, there is another point attorneys and clients also ought to be aware of regarding indemnity rights. Courts rely on indemnification agreements to support the conclusion that an injunction may issue. In particular, courts reason that if an employee is indemnified by an employer for legal costs, he or she won't suffer tremendous hardship from a temporary restraint on competitive conduct. This finding is more prevalent in cases where the indemnification agreement states that the employee will be paid his or her full salary even if a court-ordered injunction materially limits the prospective job responsibilities that the employee was hired to perform. Though indemnification agreements provide some insurance for competing employees, they also can actually help a plaintiff in seeking equitable relief.
Court: United States District Court for the District of Maine
Opinion Date: 9/29/10
Cite: OfficeMax Inc. v. Sousa, 2010 U.S. Dist. LEXIS 103736 (D. Me. Sept. 29, 2010)
Law: Federal Rules of Civil Procedure