CA Supreme Court Rejects Proposed Exceptions to Interim Adverse Judgment Rule Defense to Malicious Prosecution Action

In Parrish v. Latham & Watkins (No. S228277 – August 10, 2017) (“Parrish”), the California Supreme Court examined the “interim adverse judgment rule” in a different context than previous decisions on the subject. The rule provides that if an earlier action succeeds after a hearing on the merits, this success establishes the existence of probable cause and precludes a subsequent malicious prosecution action. In a typical case applying the rule, a plaintiff in the underlying action defeats the defendant’s motion for summary judgment but then loses the case at trial leading to a subsequent malicious prosecution claim. In Parrish, the Court addressed whether the rule applies when the trial court had denied the defendant’s summary judgment motion but concluded after the defense prevailed at a bench trial that the suit had been brought in “bad faith” due to a lack of evidentiary support.

Parrish arose from an underlying action in which two corporate officers had been sued by their former employers for the alleged misappropriation of trade secrets. The employers had contended, in particular, that the officers had solicited venture capital for their new business by presenting a business plan they had developed while still employed. The trial court denied the officers’ summary judgment motion, emphasizing evidence that established triable issues of material fact based on a presentation by one of the officers to the Board of Directors which the employers argued overlapped with the plan for the new business and the employers’ expert declarations that the business plan could not be implemented without using the employers’ proprietary trade secrets. However, during the eventual bench trial, the court denied the employers’ requests for relief and awarded the officers their costs and attorney fees under the California Uniform Trade Secrets Act, Civil Code section 3426. Under section 3426, a prevailing party may recover costs and fees “[i]f a claim of misappropriation [was] made in bad faith.” Concluding that the employers pursued the underlying action in both subjective and objective bad faith, the trial court reasoned that they had relied upon a legal theory of inevitable misappropriation unsupported by California law and knew or should have known that they had insufficient supporting evidence. It also explained that it “had not heard all the evidence or considered witness credibility” at the summary judgment stage. The appellate court affirmed.

In the officers’ subsequent malicious prosecution lawsuit against the employers’ attorneys in the underlying action, the attorneys filed an anti-SLAPP motion, arguing that the lawsuit was untimely under Code of Civil Procedure section 340.6 and that their defeat of the officers’ underlying summary judgment motion established that probable cause existed based on the interim adverse judgment rule (i.e., the denial of the defendants’ summary judgment motion established that the action was legally tenable and thus not frivolous). While the appellate court affirmed the trial court’s grant of the motion based on the apparent expiration of the applicable limitations period, it also considered the alternative argument and invoked the interim adverse judgment rule based on the trial court’s determination that the officers “had ‘failed to sustain their burden of proof on the [summary judgment] motion.’” Significantly, the appellate court also concluded that the subsequent “bad faith” finding based on a more complete record did not establish a lack of probable cause for the employers’ claims.

The Supreme Court unanimously agreed with the appellate court’s application of the interim adverse judgment rule. It explained that probable cause exists unless no reasonable attorney would agree that a claim was legally tenable and not frivolous and that “[the interim adverse judgment] rule reflects a recognition that claims that have succeeded at a hearing on the merits, unless obtained by fraud or perjury, are not so lacking in potential merit that a reasonable attorney or litigant would necessarily have recognized their frivolousness.” The officers first argued that like the fraud/perjury exception, the later finding of “bad faith” should preclude the imposition of this rule. The Court, however, disagreed, reasoning that a “bad faith” finding “does not vitiate the trial court’s earlier finding that [the employers’] suit had some arguable merit. It explained that the employers’ subjective bad faith related to the issue of whether the suit was brought with malice, not whether their claims lacked probable cause. Moreover, the finding of objective bad faith did not mean that the action lacked merit. In fact, the authority on which the trial court relied expressly stated that a finding of bad faith did not mean that any reasonable attorney would agree that the action was without merit. Because the existence of probable cause presents a question of law, the Court also cautioned against relying upon an adverse jury verdict or bench decision to infer a lack of probable cause. After all, “[a] defense verdict may reflect the weight of the evidence adduced at trial, rather than whether the evidence was sufficient to support the prosecution of a claim.”

Lastly, the Court declined to adopt the officers’ proposed exception where litigants or their lawyers inadvertently submit “materially false facts.” It explained that a probable cause determination is based upon the facts prospectively known to the litigant, and that if such facts “could support a set of inferences that would justify a favorable ruling on the merits, the litigant may rely on them in bringing suit.” Even if those inferences are later proved to be unjustified, the interim adverse judgment rule applies.

By rejecting the officers’ proposed exceptions to the interim adverse judgment rule, Parrish represents a reaffirmation of the California judiciary’s disfavor of claims for malicious prosecution. A plaintiff and his or her attorney enjoy much latitude when initiating an action. However, thereafter they are under a continuing duty throughout the litigation to evaluate whether probable cause continues to exist for the plaintiff’s claims. While they may not welcome the prospect of opposing a summary judgment motion, they have the solace of knowing that even if they do not prevail at trial having overcome such a motion, provided they did not commit fraud or perjury to achieve that result, will defeat a subsequent malicious prosecution lawsuit.

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August 21, 2017