Justices punted in Parrish decision

In a unanimous decision in Parrish v. Latham & Watkins, the California Supreme Court affirmed a judgment in favor of the defendant law firm and one of its partners. The court found that probable cause existed as a matter of law for the prosecution of the underlying case, thereby negating the plaintiffs’ claim of malicious prosecution. 2017 DJDAR 7724 (Aug. 10, 2017). The court said a ruling on the merits in the underlying case reflecting that the plaintiff might be successful establishes the existence of probable cause. This “interim adverse judgement” rule bars a later malicious prosecution suit, even if the ruling is later overturned.

The ruling in the underlying case was the denial of the defendants’ motion for summary judgment. This was sufficient to establish probable cause, even though the same judge who made the ruling later handed down a decision in favor of the defendants after a bench trial. He found the prosecution of the case to be in “bad faith” within the meaning of the Trade Secrets Act, and awarded costs and attorney fees.

The plaintiffs in Parrish, William Parrish and E. Timothy Fitzgibbons, were officers of Indigo Systems Corporation, which was acquired by FLIR Systems, Inc. Parrish and Fitzgibbons went to work for FLIR after their company was acquired, but left about two years later to start a new competing venture. FLIR and Indigo sued, claiming that Parrish and Fitzgibbons used trade secrets and solicited venture capital for their new business by presenting a business plan that had been developed for FLIR.

In the underlying case, Parrish and Fitzgibbons moved for summary judgment. In opposing the motion, FLIR and Indigo relied on the declarations of two experts who said the business plan in question could not be implemented without using proprietary trade secrets of FLIR and Indigo. The trial court said the defendants had not shown that the planned new business was not based on FLIR’s and Indigo’s intellectual property, and denied the motion.

In the malicious prosecution action, Latham & Watkins LLP and its partner filed an anti-SLAPP motion to strike. The motion was based on both (1) the interim adverse judgment rule and (2) the legal malpractice statute of limitations, Code of Civil Procedure Section 340.6. The trial court granted the motion on the latter ground, without reaching the probable cause issue. The Court of Appeal held that the malicious prosecution claim was not time barred, but affirmed its dismissal based on the interim adverse judgment rule.

The Supreme Court noted that lack of probable cause is an essential element of any malicious prosecution cause of action, and that this element presents a question of law to be determined by a judge objectively — based on whether any reasonable lawyer would consider a particular claim to be tenable. Wilson v. Parker, Covert & Chidester, 28 Cal. 4th 811, 818 (2002).

Under Wilson, a potential plaintiff and plaintiff’s lawyer may rely on evidence making a claim tenable, and do not need to weigh that evidence against potential conflicting evidence. Wilson defines the interim adverse judgment rule, which applies unless the prior ruling in favor of the underlying plaintiff was on technical or procedural grounds (not on the merits), or was procured by fraud or perjury. The plaintiffs in Parrish invited the Supreme Court “to create an exception to the interim adverse judgment rule for cases in which litigants or their lawyers have submitted materially false facts.” The court rejected this invitation, which would have the effect of allowing a judge in a malicious prosecution case to reexamine the propriety of the earlier interim adverse ruling, almost emasculating the interim adverse judgment rule.

Parrish is important because the state’s highest court has reaffirmed the strict definition of lack of probable cause applied in malicious prosecution cases. It has also upheld an important procedural mechanism for determining that, in fact, probable cause existed in the underlying case.

Parrish also involved the question of whether the plaintiffs’ malicious prosecution claim was barred by the one-year statute of limitations of Code of Civil Procedure Section 340.6. The court did not reach that question, however, since the judgment for the defendants was affirmed. It is unfortunate since there was once a direct split of authority. In Vafi v. McCloskey, 193 Cal. App. 4th 847 (2011), and Yee v. Cheung, 220 Cal. App. 4th 184 (2013), the Courts of Appeal held that malicious prosecution actions against lawyers are governed by the one-year statute of limitations in Section 340.6. Nonetheless, in Roger Cleveland Golf Company v. Krane & Smith, 225 Cal. App. 4th 660, 676-77 (2014), another division of the Court of Appeal refused to follow Vafi and Yee. It would have been helpful if the Supreme Court had not done an impersonation of Raiders Hall of Famer Ray Guy, and punt on the statute of limitations issue.

In its statement of facts, the Supreme Court noted that, after Parrish was decided at the Court of Appeal level, the high court itself in Lee v. Hanley, 61 Cal. 4th 1225 (2015), had disapproved of Roger Cleveland with respect to its holding concerning Section 340.6. The court could have cited Vafi and Yee and ruled that the statute of limitations was an alternative ground for its decision, but did not.

Probable cause issues in malicious prosecution cases are important to plaintiffs’ lawyers. They must always identify the evidence supporting the existence of a tenable claim, even if there is substantial contrary evidence. Lawyers who bring malicious prosecution actions on behalf of clients should always verify the evidence supporting a finding that probable cause did not exist in the underlying case. Since malicious prosecution litigation is expensive, professional liability insurers have an interest in the governing law. Their policies usually provide a defense, even though indemnification of an award of damages for malicious prosecution may be prohibited by public policy. Downey Venture v. LMI Ins. Co., 66 Cal. App. 4th 78, 506 (1990).

Although Parrish clarified the law relating to probable cause determination, including the interim adverse judgment rule, it did not directly resolve the conflict in the case law over the statute of limitations. It seems likely, however, that most trial courts and Courts of Appeal will and should follow the better-reasoned Vafi and Yee, rather than a case which has been expressly disapproved.