Winning on appeal can sometimes spawn further litigation, including the launching of a malicious prosecution action. Indeed, if your client has prevailed in defeating a Uniform Trade Secrets Act (“UTSA”) case, been awarded attorney fees because the trial court found that action was brought in bad faith by the former employer, and the trial court’s decision upheld on appeal, malicious prosecution jumps out as the next logical step, right?

Maybe not. According to the California Supreme Court’s recent decision in Parrish v. Latham & Watkins, 2017 DJDAR 7724 (8/10/17), it all depends on whether your client (the former employee) brought a motion for summary judgment (or other ruling on the merits but not on technical or procedural grounds) which the former employer defeated on the merits (made a minimal showing of issues of fact requiring trial). In Parrish, a former employer sued former employees for misappropriation of trade secrets under the UTSA. After defeating the employees’ motion for summary judgment on flimsy evidence but albeit arguably meritorious, the employer lost a full evidentiary trial because the employer was shown to have no factual basis for bringing the action and did so for anti-competitive reasons. The former employees obtained substantial attorney’s fees on the grounds of bad faith as defined in the UTSA. Then, of course, they filed a malicious prosecution action against the employer’s lawyers. But that action was dismissed by way of an anti-SLAPP motion.

On appeal, the Supreme Court found that the former employer’s attorneys were entitled to the protection of the “interim adverse judgment rule” which precluded a finding of malice or lack of probable cause, a necessary element of the tort of malicious prosecution. Under the rule, where a motion on the merits is defeated, that ruling establishes probable cause as a matter of law, even if later on the defendant loses at trial (or on appeal) and even if there’s a finding of bad faith. For example, the interim adverse judgment rule will apply even if the court finds that testimony or inferences proved false, so long as not known to be false or perjurious either at the inception or during the pendency of the action. Importantly, the Supreme Court reaffirmed that an attorney does not lack probable cause just because the chances of prevailing are unlikely, as the attorney need not predict how the trier of fact might weigh the evidence. Moreover, litigants are shielded by probable cause even if they believe the evidence will ultimately go against them when weighed by a trier of fact.

The Parrish decision made the important distinction that the definition of bad faith necessary to award statutory attorney’s fees under the UTSA is not inconsistent with the proof required to find the action was brought with malice and lacked the probable cause  needed to support a claim for malicious prosecution. In  a malicious prosecution action, a claim is unsupported by probable cause only if any reasonable attorney would agree that it is totally and completely without merit. This is an objective test for the trial court to determine the reasonableness of the defendant’s conduct in light of the facts known to the defendant at the institution and maintenance of the prior action.  The law firm was shielded from liability because defeating the summary judgement motion proved there was at least some arguable merit to the action but not enough to avoid the trial court’s finding of bad faith because of the lack of evidence of any trade secret theft and obvious intent to squelch a former employee’s competitive start up.

Ultimately, in Parrish, the former employer’s interim victory at the summary judgment stage, while short-lived, negated the former employees’ ability to prove lack of probable cause, the key element in their malicious prosecution action. Ironically, having prevailed on an anti-SLAPP motion, the former employer was entitled to attorney fees for the malicious prosecution action. (See Code of Civil Procedure, § 425.16(c)(1).)

In the tech world, where the fight to protect ideas gets nasty and expensive and the sooner the case can be terminated, the sooner the client’s new venture can go forward clear of any taint of a theft of proprietary information, summary judgment motions are common. However, if it is important to a client to preserve a malicious prosecution action, greater caution and scrutiny should be given to the ramifications of an unsuccessful attempt at early termination of the case by a dispositive motion; no matter how thin or flimsy the evidence of a wrongful use of proprietary information may be thought to be, dispositive motions are difficult to win and the successful defense of an ill-conceived  dispositive motion will trigger the interim adverse judgment rule protections. Thus, in many ways, Parrish points to the law of unintended consequences.

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Neil Bardack
As a litigator, Neil has been lead counsel in a substantial number of court and jury trials, appeals and arbitrations in state and federal courts in the areas of legal malpractice defense, technology, securities, fiduciary fraud, corporate and business disputes, real estate and natural resources involving environmental, water and oil and gas.