The California Supreme Court found that the denial of summary judgment in an underlying trade secrets misappropriation action established sufficient probable cause to bring an action under the California interim adverse judgment rule concerning the probable cause element of a malicious prosecution claim, even though the trade secrets action was later found to have been brought in bad faith. Parrish v. Latham & Watkins, Case No. S228277, Ct.App. 2/3 B244841 (Cal., 2017) (Kruger, J).

Plaintiffs Parrish and Fitzgibbons previously served as officers at FLIR, a microbolometer device manufacturing company (later acquired by Indigo) (the Company). They left the Company to pursue a new, competing venture and solicited venture capital by presenting a business plan allegedly developed while both were still employed by the Company. The Company sued Parrish and Fitzgibbons for trade secrets misappropriation under the California Uniform Trade Secrets Act (CUTSA).

Plaintiffs sought a summary judgment motion, arguing that the business plan was developed before they joined the Company and that no trade secrets would be misappropriated in the plan’s implementation. The Company opposed, relying on expert declarations that the business plan could not be implemented without using the Company’s trade secrets. The trial court denied the summary judgment motion. Given the “highly technical nature of the case,” the trial court concluded that the Company produced sufficient evidence to raise a triable issue as to misappropriation, and that Parrish and Fitzgibbons did not sustain their burden of showing that the new business plan was not based on the Company’s intellectual property.

After the bench trial, the judge denied the Company’s request for relief, concluding that the Company had pursued the action in subjective and objective bad faith that was rooted in an “anticompetitive motive.” The trial judge also stated that the Company relied on a legal theory of inevitable misappropriation that was not supported by California law, and that the Company knew or should have known that it did not have sufficient evidentiary basis to initiate and continue the lawsuit through trial. Parrish and Fitzgibbons were awarded more than $1.6 million in fees and costs. Not only was the decision affirmed on appeal, but the appellate court also rejected the Company’s argument that the trial court was estopped from finding bad faith because it had earlier denied Parrish and Fitzgibbons summary judgment motion. However, that denial was based on the experts who, at trial, “admitted there was no valid scientific methodology to predict trade secret misuse and agreed that no trade secrets were misappropriated.”

Parrish and Fitzgibbons then brought the present malicious prosecution claim against the Company’s counsel. In response, defendants filed an anti-SLAPP motion to strike the malicious prosecution claim, which the court granted because the action was untimely under the one-year statute of limitations (Cal. Civ. Proc. 340.6(a)). Plaintiffs appealed.

During that appeal, the Court of Appeal issued its 2014 ruling in Roger Cleveland Golf, which held that a two-year—not one-year—statute of limitation applied to a malicious prosecution case when filed against a former litigation adversary’s lawyer. The appellate court nevertheless ruled that the interim adverse judgment rule applied, i.e., the Company was not liable for malicious prosecution because it did not lack probable cause.

Plaintiffs petitioned the California Supreme Court for review. While the petition was pending, the California Supreme Court issued its 2015 ruling in Lee v. Hanley, which disapproved Roger Cleveland and held that the one-year statute of limitation applied. However, the California Supreme Court did not reach the statute of limitations issue on appeal, having agreed that the interim adverse judgment rule applied. 

Practice Note: Had the adverse judgment been obtained by fraud or perjury, the interim adverse judgment rule would not apply. Here, however, the California Supreme Court concluded that the trial court judgment had not been obtained through fraud or perjury, and as such, the California trial court’s post-trial finding that the trade secrets suit was brought in “bad faith” within the meaning of CUTSA did not “vitiate the [court’s] earlier finding that [the Company’s] suit had some arguable merit.” In other words, the earlier denial of summary judgment in the underlying trade secrets action established probable cause to bring that action.