November 20, 2013

A municipality may rescind its decision to defend and indemnify an employee being sued for acts or omission that occurred performing official duties if the individual fails to cooperate

A municipality may rescind its decision to defend and indemnify an employee being sued for acts or omission that occurred performing official duties if the individual fails to cooperate
Lancaster v Incorporated Village of Freeport, 2013 NY Slip Op 07652, Court of Appeals

The Court of Appeals ruled that a municipality, here the Village of Freeport, may withdraw from its defense and indemnification obligations otherwise required under provisions of the Freeport Village Code §130-6 adopted pursuant to Public Officers Law §18* in the event current and former municipal officials and officers being sued in a civil action decline to accept a reasonable settlement offer. Further the court said that “First Amendment concerns with respect to the settlement's nondisclosure clause do not warrant a different conclusion.”

However, §130-6 of the Code provided that the Village's duty to defend and indemnify "shall be conditioned upon: . . . the full cooperation of the employee in the defense of such action or proceeding against the Village based upon the same act or omission"

According to the decision, the Freeport Board of Trustees authorized the Village to defend and indemnify the employees named in the civil action and retained separate counsel to represent the Village and employees in the litigation.

Subsequently the Village's counsel began settlement negotiations with the plaintiffs and an agreement whereby the plaintiffs would dismiss the actions against the Village in return for $3,500,000 paid over six years. In addition, the settlement agreement included a “nondisparagement clause” and required the employees to "agree not to ever interfere, nor challenge or criticize the terms of either Stipulation [of Settlement] in any manner."

The employees’ counsel indicated that, in his opinion, “the nondisparagement clause constituted a "concerted effort by the Village and the plaintiffs to silence any comment by [the employees] in this matter of public concern, particularly as to those who hold public office, is misguided at best and could be construed as a threat to [the employees’] First Amendment rights.” The employees’ suggest revisions “to avoid even the impression of an effort to impinge on anyone's right to express themselves or to coerce any public official from fulfilling his/her responsibilities.”

The Village's counsel replied indicating that: the proposed settlement did not violate employees' free speech rights; the settlement was advantageous for employees §18; and refusal would be patently unreasonable and a breach of their duty to cooperate under the Public Officers Law** and Village Code.

The employees refused to settle. The Board subsequently met in executive session and resolved to withdraw providing for the employees’ defense and indemnification. However, the employees continued to litigate the actions at their own expense and subsequently initiated a “hybrid Article 78 proceeding and declaratory judgment action seeking a judgment (1) vacating the withdrawal; (2) directing [the Village] to provide a defense; and (3) declaring invalid the Village's disclaimer of any further obligation to defend [the employees].”

Supreme Court denied the petitions and dismissed the proceedings, rejecting the employees’ arguments that “the Village had infringed their First Amendment rights, improperly withdrawn the defense and indemnification for lack of cooperation, or violated the Open Meetings Law.” The Appellate Division sustained the Supreme Court ruling and the Court of Appeals affirmed.

The Court of Appeals rejected the employees’ argument that (1) the Village violated their free speech rights by withdrawing the defense and indemnification; (2) their refusal to settle did not constitute a failure to cooperate justifying revocation of the defense and indemnification under Public Officers Law §18; and (3) the Board violated the Open Meetings Law by withdrawing the defense and indemnification in executive session.

The Court of Appeals said that the employees had advance two argument: [1] the requirement of a nondisparagement clause was an impermissible prior restraint on free speech, and [2] penalizing the employees for refusing to refrain from criticizing the settlement was unconstitutional retaliation. The court found neither argument persuasive.

The court noted that the evidence does not show the Village to have actively sought to restrict the employees’' speech. If, on the other hand, were there. for example, that as part of the settlement, the Village induced the plaintiffs to include the nondisparagement clause in the settlement with employees, said the court, this might be a different case.

The Court of Appeals explained that the plaintiff’s inclusion of the nondisparagement clause in the settlement offer was not a prior restraint on speech as plaintiff was a private party and entitled to offer settlement on whatever terms it saw fit. Had employees accepted the settlement and breached its terms, only the plaintiff, not the Village, could have sued to enforce it.

As the employees’ claim that the Village's "threat" to withdraw the defense and indemnification a prior restraint on speech, the Court of Appeals noted that "[T]he First Amendment prohibits government officials from encouraging the suppression of speech in a manner which can reasonably be interpreted as intimating that some form of punishment or adverse regulatory action will follow the failure to accede to the official's request." Here, however, the reason the Village threatened to withdraw funding was to end the litigation and save public funds, rather than to suppress speech.

The court also observed that the withdrawal of it obligation to provide for the employees’ defense and indemnification was not a prior restraint on speech but rather a response to employees' failure to cooperate. It was not a restraint on what petitioners could say in the future as the employees were free to continue litigating and criticize the settlement as they pleased.

The Court of Appeals affirmed the lower courts’ decisions, Judge Pigott dissenting.

* Presumably the same ruling would control with respect to officers and employees of the State as the employer seeking “defense and indemnification” pursuant to §17 of the Public Officers Law in any civil action or proceeding in any state or federal court arising out of any alleged act or omission which occurred or is alleged in the complaint to have occurred while the officer or the employee was acting within the scope of his or her public employment or duties
** §17.5 of the Public Officers Law provides, in pertinent part, “The duty to defend or indemnify and save harmless prescribed by this section shall be conditioned upon: … (ii) the full cooperation of the employee in the defense of such action or proceeding and in defense of any action or proceeding against the public entity based upon the same act or omission, and in the prosecution of any appeal.

The decision is posted on the Internet at:


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