Interim adverse judgment rule

Zealous advocacy may foreclose your ability to file a malicious prosecution action after successfully defending a lawsuit

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You’ve successfully defended a lawsuit and obtained a jury verdict in your favor. You lean back, contemplate all of plaintiffs’ actions in the prior case, and think you’ve got a slam dunk malicious prosecution case, right? Not so fast.

The California Supreme Court, in Parrish v. Latham & Watkins, LLP, recently upheld a lesser known principle, referred to as the “interim adverse judgment rule,”[1] which, if applied to your malicious prosecution case, may bar your claim.

What is the Interim Adverse Judgment Rule?

To properly understand the IAJR, one must first look to the elements of a malicious prosecution claim: 1) the underlying action was commenced by or at direction of defendant and ended in plaintiff’s favor; 2) the underlying action was brought without probable cause; and 3) the action was brought with malice.[2]

The IAJR provides that certain non-final rulings on the merits in the underlying case, i.e., denial of a motion for non-suit, denial of summary judgment, etc., establish the existence of probable cause to pursue the underlying claim. The theory is that the trial court had an opportunity to determine whether the underlying claim had merit when considering the dispositive motion and decided it had the minimal merit sufficient to allow the claim to proceed to a trial. The IAJR allows the malicious prosecution defendant to negate the second element of the malicious prosecution claim – a lack of probable cause in pursuing the underlying action – by pointing to a favorable interim ruling on the merits of the underlying action to show there was probable cause for its underlying claim, even if that ruling was overturned on appeal or the malicious prosecution defendant lost the underlying action.[3]

Can A Malicious Prosecution Defendant Point to Any Prior Favorable Ruling To Show Probable Cause Using the IAJR?

No. But the bar to defeat the probable cause prong isn’t high. Given the public policy to avoid chilling novel or colorable claims, a claim need merely be “arguably tenable” to have probable cause. An attorney or litigant does not lack probable cause merely because the claim is unlikely to succeed, or a trier of fact is likely to weigh the evidence against the litigant.

The policy behind the IAJR is that if the malicious prosecution defendant (the plaintiff in the underlying action) obtained a favorable ruling relating to the merits of the underlying action, then the action must have had the requisite level of probable cause – i.e. it must have been at least arguably tenable. As such, the denial of a defense summary judgment motion is typically sufficient to satisfy the IAJR and defeat a malicious prosecution case. Additionally, the IAJR is broadly construed. One court of appeal has even considered the denial of a defense non-suit motion in a lemon law case on the collateral issue of treble civil penalties to be sufficient to meet the IAJR’s requirements because in finding that the defense did not meet its burden to show that treble civil penalties could not apply, the court of appeal reasoned that the trial court inherently had to consider whether plaintiff had a colorable claim on the merits of the underlying lemon law claim.

However, there are two (2) notable exceptions to the IAJR: (1) fraud or perjury; and (2) a ruling based on procedural or technical grounds. Therefore, if the court denied the summary judgment motion because of fraud or perjury, or on technical grounds that did not reach the merits of the case, the denial will not bar a malicious prosecution claim. But these exceptions are limited. The IAJR will apply even if testimony or inferences supporting the interim adverse judgment are proven false, as long as they were not known to be false or perjured when made. Additionally, the exceptions do not excuse sloppy law and motion work by defendants in the underlying action – if the defense moves on substantive grounds and loses, absent fraud or perjury, the ruling will likely preclude a subsequent malicious prosecution claim.

Details of the Parrish Case: No Trade Secret Bad Faith Exception to the IAJR

In Parrish v. Latham & Watkins, the California Supreme Court decided whether the IAJR applied to bar a malicious prosecution action where the defendant in the underlying case lost a summary judgment motion (the interim adverse judgment), but won at trial, and the trial court determined (post-trial) that the underlying trade secret case was brought in “bad faith” within the meaning of the California Uniform Trade Secrets Act (CUTSA). The answer: there is no bad faith exception to the IAJR and Parrish was estopped from proving his malicious prosecution case given the interim adverse judgment against him, which found that Latham and Watkins’ client’s suit had some arguable merit, thereby establishing the requisite probable cause. In so holding, Parrish reinforces the high burden to win a malicious prosecution case since even “[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.”

In Parrish, Latham and Watkins’ client, FLIR Systems, sued its former employees Parrish and Fitzgibbons for threatened trade secret misappropriation. FLIR claimed that the former employees planned to produce a product which they could not do without using FLIR’s technology. The former employees moved for summary judgment, and the trial court ruled against them based on expert declarations that no other company had the technology for their plan, meaning the employees had to use FLIR’s technology. At trial, it came out that another company did have the necessary technology, disproving the expert testimony which formed the basis for denying the employee defendants’ summary judgment motion. The trial court even found that FLIR had pursued its misappropriation lawsuit in bad faith for anti-competitive reasons. But the damage to defendants’ malicious prosecution claim had already been done.

When the former employees sued FLIR and its attorneys, Latham and Watkins, for malicious prosecution, Latham filed an anti-SLAPP motion claiming that the IAJR precluded the malicious prosecution claim because the trial court had denied the former employees’ summary judgment motion. At rehearing, the Court of Appeal determined that the trial court’s finding that the trade secret lawsuit was brought in “bad faith” under the meaning of that statute did not mean that there was no probable cause for the suit. Bad faith did not necessarily fit within the fraud/perjury exception.

The former employees then appealed to the Supreme Court, which affirmed that the employer’s subjective bad faith related to the third prong of a malicious prosecution claim – malice – not whether the trade secret claim lacked probable cause. As to objective bad faith, the Court found that the trial court relied on authority which expressly stated that a finding of objective bad faith under CUTSA did not necessarily mean that no reasonable attorney would agree the suit lacked merit. Frustratingly for Parrish, he could not win his malicious prosecution suit because the trial court had denied his summary judgment motion based on declarations that were later disproved.

A Warning for Defendants Interested in Preserving Malicious Prosecution Claims

Attorneys often do not litigate and defend a lawsuit with an eye towards later bringing a malicious prosecution action. That analysis usually occurs after the underlying case is decided. Meanwhile, the defendant and its attorney attempt to terminate the underlying lawsuit early and often – by whatever legal means available – including motions attacking the merits of plaintiff’s claims.

However, the IAJR and the Parrish decision warn defendants: if you are interested in preserving a malicious prosecution claim, think twice about the consequences of an unsuccessful interim motion. In cases in which it is not clear that the dispositive motion will be effective and the likelihood of success is minimal due to potential disputed facts, but the defense case would be very strong in front of a fact-finder, it may make sense to resist bringing a questionable dispositive motion and instead proceeding to trial. While it is good to remember this warning, the nature of litigation and the inherent inability to predict the future make it difficult to perfectly evaluate the risks of an interim motion. Nevertheless, the warning is significant enough that zealous attorneys should stop and take note of these risks. Thus, defense counsel is wise to inform their client in advance of advocating a dispositive motion of the effect it can have on the client’s ability to prevail in a subsequent malicious prosecution action.

A Warning for Litigants and Attorneys Filing Malicious Prosecution Claims

While not the focus of this article, it is important to be aware that the filing of a malicious prosecution action is inherently “slappable,” meaning it is subject to a Special Motion to Strike under California’s Anti-SLAPP law. An Anti-SLAPP motion is an effective tool for a malicious prosecution defendant to obtain a dismissal of the case and recover attorney’s fees in response to the complaint at the beginning of the case. The filing of an Anti-SLAPP motion stays the action, meaning the malicious prosecution plaintiff cannot obtain discovery to support his or her case before the motion is decided, except under limited circumstances that require leave of court.

When deciding an Anti-SLAPP motion, the trial court must decide based on admissible evidence whether the claim is based on defendant’s protected free speech or petitioning activity.[4] A malicious prosecution action, by definition, is based on a defendant’s protected petitioning activity.[5] Once the trial court determines the claim is based on protected activity, the burden shifts to the malicious prosecution plaintiff to prove through admissible evidence that he or she is likely to prevail on the merits of the malicious prosecution claim.[6] Thus, if you are contemplating filing a malicious prosecution action, you should be prepared to prove your case at the pleading stage without discovery.

[1] Parrish v. Latham & Watkins, LLP (2017) 4 Cal. 5th 767.

[2] Downey Venture v. LMI Ins. Co. (1998) 66 Cal. App. 4th 478.

[3] Yee v. Cheung (2013) 220 Cal. App. 4th 184, 200-201.

[4] Navellier v. Sletten (2002) 29 Cal.4th 82, 89.

[5] Raining Data Corp. v. Barrenechea (2009) 175 Cal.App.4th 1363

[6] Wilson v. Parker, Covert & Chidester (2002) 28 Cal.4th 811, 821; Baral v. Schnitt (2016) 1 Cal.5th 376, 384.