On April 17th, 2012, we blogged about a malicious prosecution claim brought against Latham & Watkins in Los Angeles Superior Court. The suit alleged that the Plaintiffs, William Parrish and Timothy Fitzgibbons, were former officers and shareholders of Indigo Systems Corporation, which was purchased by FLIR Systems, Inc. in 2004. From 2004 to 2006 the Plaintiffs worked for FLIR, leaving in 2006 to start their own business. FLIR retained Latham and sued them for, among other things, misappropriation of trade secrets. The trial court denied FLIR’s request for a permanent injunction, found FLIR brought the trade secrets action in bad faith, and awarded attorney’s fees and costs of $1,641,216.78. The trial court’s decision was affirmed on appeal. FLIR Systems, Inc. v. William Parrish, et al., 174 Cal.App.4th 1270 (2009).

In our blog post, we noted that:

The malicious prosecution complaint against Latham alleges that there is a related malicious prosecution action against FLIR and that Plaintiffs did not discover the basis for the malicious prosecution action against Latham until May 2010, when FLIR indicated at a court conference in the related malicious prosecution action that they might by invoking the advice of counsel defense. So it appears there will be a statute of limitations defense to be litigated.

We will follow the progress of this case, and it will be interesting to see if Latham files a motion pursuant to California’s anti-SLAPP law (a strategic lawsuit against public participation – California Code of Civil Procedure 425.16).

Latham & Watkins did file an anti- SLAPP motion contending, in part, that the Plaintiffs’ claims were barred by the statute of limitations. The motion was granted by the trial court, which held that a one-year statute of limitations period applied to the Plaintiffs’ claims. On August 27, 2014, the Court of Appeal issued its opinion reversing the trial court.

Latham’s anti- SLAPP motion argued that the Plaintiffs would be unable to establish a reasonable probability of prevailing on their action, contending that (1) a one-year statute of limitations applied to Plaintiff’s claims, and that the claim was untimely under that limitations period and that (2) the trial court’s denial of summary judgment for the Plaintiffs on the claims brought against them by FLIR established that the underlying action was brought with probable cause as a matter of law. The trial court granted Latham’s motion on statute of limitations grounds, and did not expressly address Latham’s argument that the claims against them were without probable cause.

The Court of Appeal held first that the applicable state of limitations for malicious prosecution claims was not the one-year period set forth in Cal. Code Civ. Proc. Section 340.6, but rather the two-year limitations period set forth in Cal. Code Civ. Proc. Section 335.1. Under that limitations period, all parties agreed the action was timely. The Court of Appeal then considered Latham’s argument that the Plaintiffs did not have a probability of prevailing on their malicious prosecution complaint. Specifically, Latham contended that the Plaintiffs could not establish, as a necessary element of their malicious prosecution claim, that the underlying claim against the Plaintiffs had been brought without probable cause. Key to Latham’s argument was the fact that the Plaintiffs had moved for summary judgment in the underlying case, and that motion had been denied. Latham argued that the “interim adverse judgment rule” applied. Under that rule, claims that have succeeded at a hearing on the merits, unless such ruling is obtained by fraud or perjury, are deemed not so lacking in potential merit to serve as the basis for a malicious prosecution claim, even if the judgment is later reversed on appeal. Courts had applied the interim adverse judgment rule to bar claims for malicious prosecution where there had been a denial of a defendant’s motion for summary judgment in the underlying action.

The Court of Appeal noted that the interim adverse judgment rule would not apply in cases where there had been perjury or fraud, or where the motion for summary judgment had been denied on technical or procedural grounds. Further, the Court of Appeal noted that the rule does not apply where there is an ultimate ruling in the underlying action that the underlying action was, in fact, brought in bad faith. In the underlying case against the Plaintiffs, the trial court had found, after denying the Plaintiffs’ motion for summary judgment, but after a trial on the merits, that the case against them had been brought in bad faith.

The Court of Appeal held that the trial court’s finding that the underlying action had been pursued in bad faith was some evidence that probable cause did exist for the malicious prosecution claim. The Court of Appeal further held that, even without considering that finding, the Plaintiffs had established that the claims against them had been brought without probable cause. The Court of Appeal noted that the Plaintiffs had evidence that: (1) Latham filed a complaint alleging actual misappropriation of a business plan, disregarding a claim that the Plaintiffs had created the business plan prior to their employment with FLIR, (2) that, when Plaintiffs presented that evidence to Latham, Latham changed the theory of the case to pursue a claim that the Plaintiffs could not effectuate the business plan without using FLIR’s intellectual property, (3) that Latham knew that inevitable disclosure is not a viable legal theory in California, and therefore knew that this theory lacked legal basis, (4) that the factual basis for Latham’s theory was expert testimony that considered only publicly available technology when Latham knew that the Plaintiffs’ business plan would be using non-public technology obtained lawfully from third parties and (5) that FLIR’s President testified that he had no factual basis to assert that the Plaintiffs would use FLIR’s intellectual property, strongly implying that the claim against them was a pre-emptive strike. Critically, the Court of Appeal found that Latham had “sought an obviously anti-competitive injunction based on the speculative possibility that the [Plaintiffs’] product might violate its client’s trade secrets . . . .” The Court of Appeal held the relief sought and the basis therefore supported the conclusion that “no reasonable attorney would have believed [the] case had merit.”

The Court of Appeal held that the Plaintiffs had established a reasonable probability of prevailing on the element of lack of probable cause and reversed the trial court’s order granting Latham’s anti-SLAPP motion.

This opinion is a must read for trade secret litigators and establishes—at least in California—that there is a thin line separating hard ball litigation tactics from litigation that is deemed anti-competitive and which creates substantial risk for both plaintiff and plaintiff’s attorneys.