Heads I Win, Tails You Lose. Court Finds Indemnity Provision Went Too Far

We all love David and Goliath stories. The underdog winning against the far stronger (and dastardly) opponent. Think Rocky Balboa versus Ivan Drago, the Star Wars Rebellion versus the Galatic Empire, Indiana Jones versus a good chunk of the Third Reich. And now, we have Margaret Williams.

The Story of Margaret Williams and her LLC

The story, told in Long Beach Unified School District v. Margaret Williams, LLC, Case No. B290069 (December 9, 2019), is about Margaret Williams. Ms. Williams (we’ll just call her “Margaret” going forward because it just  sounds better when telling a story) worked for nearly ten years full-time for the Long Beach Unified School District, toiling day in and day out doing construction management and environmental c
ompliance work, including work involving the clean up of  material at a school construction site contaminated with arsenic.

Although she worked full-time for the District for nearly ten years, she wasn’t an employee. Rather, she was a contractor. And, on top of it all, as a condition of working for the District, the District required that she form a company in order to contract with the District. According to Margaret, “In order to work with the District, I was directed . . . to form a corporation or partnership. This was the only way I could work for the District: I could not enter into a contract with the District as an individual.” So, in 2006, she formed a company, simply called Margaret Williams, LLC.

In 2013, the District’s general contractor for a new school illegally brought contaminated material onto the project site. Margaret directed Link Corporation, the District’s construction supervisor at the site, to remove the contaminated materials. Link, however, ignored her. Through the following year, Margaret tried to resolve the problem by discussing it with two District administrators, one of whom, told her to oversee the cleanup at the site.

According to Margaret, District employees overseeing the site “deliberately interfered” with her efforts to prevent the mishandling of contaminated material. She wrote a letter to District administrators telling them that her ability oversee the cleanup of the site was “completely neutralized,” that her access to her District email account and a facility server had been disabled, and that no one would explain these events. Again, according to Margaret, “[M]y ability to do my  job has been completely eliminated by these actions, the ability to run my business impacted. I cannot even contact my own company staff without getting on the server and accessing my emails. I have worked in the District for almost 10 years and everything is on that computer . . .”

When Margaret sent a report to the Department of Toxic Substances and Control asking for their help to ensure the District properly clean up the site she received a letter from the District terminating its contract  with Margaret’s company based on its employee’s failure to return to work. Shortly thereafter, Williams was rushed to the hospital due to sudden illness and diagnosed with arsenic poisoning. But, of course, since this is a legal blog, you know that’s not the kicker.

Margaret and her company later sued the District under Government Code section 12653 which permits employees, contractors and/or agents to sue if discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of his her employment. Her company’s contract with the District, however, contained an indemnity provision requiring her company to indemnity and hold the District entirely harmless from all liability arising out of:

  1. Death or bodily injury to a person;
  2. Injury to, loss or theft of property;
  3. Any failure or alleged failure to comply with any provision of law [note: that’s a whopper of a provision]; or
  4. Any other loss, damage expense due to any of the foregoing suffered by Margaret’s company, anyone employed by Margaret’s company or District, or in any way connected with the Project.

The District, relying on the indemnity provision, filed a cross-complaint against Margaret Williams, LLC alleging that her company had breached its contract by failing to indemnify the District from the company’s own claim and the claim of its employee, Margaret.

In response, Margaret Williams, LLC filed an anti-SLAPP motion asking the trial court to strike the District’s cross-complaint in its entirety, basically, on the ground that the cross-complaint was an end-run around to prevent Margaret and her company from suing the District for retaliatory termination. In its opposition, the District argued that it’s cross-complaint was not based on Margaret and her company’s underlying complaint, but rather, on the Margaret William, LLC’s refusal to defend and indemnify the District at it had agreed to in in its contract.

The trial court was having none it. At the hearing on the anti-SLAPP motion, the Court stated, “[I]f I read it correctly it essentially says regardless of how plaintiff prevails or fails to prevail on the main complaint, that no monies will be paid because she has agreed to indemnify everyone in the case.” The trial court granted the motion finding that the cross-complaint arose from protected activity and that the District had failed to demonstrate a probability of prevailing.

The District appealed. It also appealed an order from the trial court denying its application to include nine additional pages to its opposition brief.

The Appeal

On appeal, the 2nd District Court of Appeal explained a two-step process in analyzing anti-SLAPP motions. The first, explained the Court is that a defendant, here Margaret, must take two related showings. First, “[c]omparing its statements and conduct against the statute, it must demonstrate activity qualifying for protection.” And, second, “comparing that protected activity agains the complaint, it must also demonstrate that the activity supplies one or more elements of a plaintiff’s claims.” “Protected activity,” explained the Court, “includes the filing and prosecution of lawsuits” as well as “conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest.”

Here, held the Court of Appeal, the District’s cross-claims for defense and indemnity would have no basis without Margaret and her company’s underlying complaint:

The District’s own position is that its cross-claims arose from Williams LLC’s refusal to defend and indemnify the District in the Underlying Action. This refusal was protected conduct in furtherance of petitioning connection with an issue of public interest. A refusal to fund the defense of one’s own litigation – and the defense of a co-plaintiff’s claims arising from the same facts – is out in furtherance fo the litigation. Further, the Underlying Action is connected with an issue of public interest. Its allegations concern an environmental hazard at a construction site for a public school, violations of the state’s requirements for remedying that hazard, and a public school district’s punishment of resistance to those violations.

The second step in analyzing anti-SLAPP motions explained the Court of Appeal, is that the plaintiff, here the District, must demonstrate a probability of prevailing on each claim arising from protected activity. In analyzing a plaintiff’s burden, explained the Court, the court applies a “summary-judgment-like procedure,” “does not weigh evidence or resolve conflicting factual claims,” and “should consider whether the defendant’s evidence in support of an affirmative defense is sufficient, and if so, whether the plaintiff has introduced contrary evidence, which, if accepted, would negate the defense.”

Here, held the Court of Appeal, Williams LLC raised an affirmative defense in its anti-SLAPP motion that the District could not prevail on its cross-claims because the indemnity provision is unconscionable and that the District had failed to negate that defense. Discussing the “substantive unconscionability” of the District’s indemnity provision, the Court stated:

Here, the indemnity provision drafted by the District . . . purports to preclude any possibility of Williams LLC obtaining meaningful recovery on a broad category of meritorious claims. The provision requires Williams LLC to indemnify the District for all liability for specified types fo damage sustained by Williams LLC itself as a result of the District’s conduct . . .

Further, explained the Court of Appeal, the District’s indemnity provision was “procedural unconscionable” because it was a contract of adhesion offered on a “take it, or leave it, basis,” Margaret only formed her company at the demand of the District who would not enter into a contract with her as an individual, and the indemnity provision itself came with a “surprise” in that it required each party to bear their own attorney’s fees and costs yet at the same time required Margaret’s company to defend the District thereby nullifying that very same provision.

Conclusion

We all love indemnity clauses when we can dictate their terms. However, Margaret Williams, LLC, while based on some pretty unique facts, provides an example of when indemnity provisions can go too far.

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