Divided Ohio Supreme Court Addresses Unfair Competition Battle Brought Against Former Employees

Last week, a divided Ohio Supreme Court issued a decision in a well-publicized case initially brought by a large non-profit employer against a small company started by former employees.  American Chemical Society. v. Leadscope, Inc., Slip Opinion No. 2012-Ohio-4193.   The initial lawsuit was brought in 2002 and involved claims for breach of employment agreements, misappropriation of trade secrets, unfair competition, breach of fiduciary duty and the duty of loyalty, and conversion, etc.    The defendant company brought counter-claims for unfair competition, tortious interference and defamation on the grounds that the lawsuit was unfounded and brought solely to drive it out of business and because of statements made to the plaintiff employer’s employees and the media.  After an eight-week trial in 2008, the jury awarded the defendant company $26.5M on its claims for unfair competition and defamation. The Franklin County Court of Appeals affirmed the verdict.   The Supreme Court held that before an unfair competition claim can be based on the filing of a lawsuit, the lawsuit must be objectively baseless – which is a higher standard than the lack of good faith.  Although the plaintiff’s claims survived a directed verdict motion, the Court’s majority nonetheless found that the plaintiff failed to produce any evidence to support its claims and, thus, the claims were objectively baseless.   More surprisingly, a majority of the Court (almost all of the justices) supported the dismissal of the defamation claim even though the jury had found that the plaintiff had abused its privilege to report the status of the litigation.  The Court found the statements in context only repeated the company’s position and that the company could not be held liable for the statements of its attorney unless it affirmatively ratified them.

With respect to the unfair competition claim, the trial court had borrowed the standard from the law of malicious prosecution and instructed the jury that they could find for the defendant company if the plaintiff’s lawsuit was not brought in good faith, but was brought with the intention of injuring the defendant.   The Supreme Court held that this standard was too low (in light of a citizen’s First Amendment right to petition government for redress) and instead, adopted the following standard:

To successfully establish an unfair competition claim based upon legal action, a party must show that the legal action is objectively baseless and that the opposing party had the subjective intent to injure the party’s ability to be competitive.

Several of the dissenting/concurring justices would have remanded the case for another trial under the new standard. (After all, the plaintiff had survived a directed verdict motion, which indicates that the trial court found some objective basis to exist).   However, the majority concluded that the plaintiff had failed to introduce any evidence to support its claims and, therefore, a new trial – more than 10 years after the facts at issue – was unnecessary and burdensome.    In short, the Court found the plaintiff company’s concerns that the defendant employees had misappropriated a software program had not been proven when the defendants’ competing program was written in a different language and, according to expert opinions, did not share any code.  That the competing software accomplished the same objective was not actionable.  (The Court’s discussion of the plaintiff company’s evidentiary objections was interesting in that the plaintiff company objected to the introduction of evidence that may have actually supported its decision to bring the lawsuit).

The defamation claim was based on a memorandum written to the plaintiff’s employees about the lawsuit and directing them not to comment on it.   The jury found that the plaintiff had abused its qualified privilege by indicating that the defendant employees had misappropriated intellectual property.  The Court found that, in context, the memorandum was nothing than the typical directive for employees to not comment on a lawsuit (which, coincidentally, the NLRB has indicated would be inappropriate).  The syllabus holding on this is stated as follows:

In determining whether a statement is defamatory as a matter of law, a court must review the totality of the circumstances and read the statement in the context of the entire publication to determine whether a reasonable reader would interpret it as defamatory.

The second allegedly defamation statement was contained in a news article about the litigation and quoted the plaintiff’s attorney discussing the claims made.  Again, the jury found the attorney to be speaking as an agent of the plaintiff and that the statements exceeded the applicable qualified privilege.  Nonetheless, the Court again found the statements were appropriate in context.  More importantly, the Court found that the plaintiff client could not be held vicariously liable for statements made by its attorney unless it authorized or ratified them.

 The Court was unusually divided on this case.  Three justices joined the majority opinion.   One justice would have affirmed the trial court on all claims, but joined the majority to affirm the unfair competition judgment.   Two other justices concurred with all of the syllabus paragraphs (i.e., the rules of law) and the reversal of the defamation claim, but dissented on the failure to remand the unfair competition claim.   Finally, one justice agreed with the higher standard for unfair competition, but would have affirmed the defamation claim and remanded the unfair competition claim.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit Provides Guidance for Imposing Attorney Fees on Unsuccessful Plaintiffs Who Bring or Pursue Frivolous Employment Claims.

Today, the Sixth Circuit affirmed in part and remanded in part a federal court sanction which imposed joint and several liability upon the plaintiffs’ attorney and eight unsuccessful plaintiffs who pursued discrimination and wrongful discharge claims against their former supervisors and managers at the Cuyahoga County Juvenile Court. Garner v. Cuyahoga County Juvenile Court, No. 07-3602. The Sixth Circuit agreed with the district court’s analysis of the merit of the plaintiffs’ claims and affirmed the award of $69,345 in Rule 54 costs, but remanded the $660,103 attorney fee award so that the district court could articulate how the fees should be re-allocated in consideration of (i) each plaintiff’s respective ability to pay; (ii) the admission of the plaintiffs’ attorney that she was primarily responsible for prosecution of the frivolous claims; (iii) the potential conflict of interest between the plaintiffs’ and their attorney on this issue; (iv) each plaintiff being responsible for their own claims and not for the prosecution or defense of other plaintiffs’ claims; and (v) the point in time when each plaintiffs’ claim became frivolous and should have been dropped. Most saliently, the Court found it inappropriate to impose joint and several liability for the fee sanction when there were factual differences in the claims and the plaintiffs’ attorney had admitted her primary responsibility for prosecuting the frivolous claims.

According to the Court’s opinion, the discrimination and wrongful discharge claims of fourteen plaintiffs had been consolidated into one lawsuit and all of them were dismissed on summary judgment in a 250-page opinion. Some of the claims were dismissed because the plaintiff failed to present evidence to substantiate each element of the prima facie case (i.e., the “no evidence plaintiffs”) and some were dismissed because the plaintiff could not show that the defendants’ non-discriminatory/retaliatory explanation was pretextual (i.e., the “insufficient evidence plaintiffs”). After the dismissal of the case, the defendants filed a bill of costs under Civil Rule 54 in the amount of $69,345 (for, among other things, deposition transcripts, witness fees, copies). The defendants then moved for reimbursement of their $664,885 in attorneys fees from the plaintiffs on the grounds that the claims were frivolous under 42 U.S.C. § 1988. Defendants also sought sanctions against the plaintiffs’ attorneys under “28 U.S.C. § 1927, [Civil Rule] 11 .. , Ohio Revised Code § 2323.51, and the court’s inherent authority.”

The district court awarded costs to the Defendants and imposed joint and several liability against all of the plaintiffs. In granting the defendants’ fee motion for $660,103 in fees, the district court did not impose any fee sanctions upon the insufficient evidence plaintiffs or under Civil Rule 11, but held that the remaining claims were frivolous, should not have been pursued at all (and certainly not beyond the close of pre-trial discovery) and justified sanctions against eight of the plaintiffs and their attorney on a joint and several liability basis. The Sixth Circuit agreed with the district court’s analysis of the merits of the plaintiffs’ claims, affirmed the award of Rule 54 costs, and affirmed that the plaintiffs’ attorney could be liable for fees under § 1927, but remanded the attorney fee award so that the district court could reconsider and articulate how the fees should be re-allocated.

As an initial matter, the Sixth Circuit “conclude[d] that the district court erred in holding each employee jointly and severally liable with respect each other’s claims, as opposed to individually liable, for attorney fees under 42 U.S.C. § 1988. While “[t]he employees here all shared a disparate-impact claim involving common allegations about the CCJC’s employment practices, . . . this lone claim does not justify imposing the entire fee award jointly and severally among all of the employees in this case. Most of the individual employees’ claims are in fact unrelated. The disparate treatment claims, for example, do not share a common factual nexus. And the retaliation claims similarly involved different allegations unique to each employee. Indeed, the employees’ respective claims were sufficiently distinct that the district court decided to issue individual summary judgment orders against each one.”

The Court also remanded the sanction award so that the district court could better articulate how the fee sanction should be allocated in light of each plaintiff’s ability to pay. While the court agreed that each plaintiff bore the burden of proving an inability to pay their share of the sanction, “[w]e are nevertheless troubled by the district court’s failure to explain why the salary information provided to the court was insufficient to establish the employees’ inability to pay. In particular, the court itself recognized, in the portion of its order addressing costs, that the employees had “modest incomes” averaging about $35,000 per year. We are therefore puzzled as to why this information was not addressed in the portion of the court’s order discussing the calculation of attorney fees . . . The district court’s obligation to “explain its reasoning adequately” exists irrespective of which party bears the burden of persuasion to demonstrate an inability to pay.”

The Court also remanded so that the district court could explain when the sanctions began to accrue. “The parties disagreed during oral argument as to whether the attorney fees improperly included legal work done before the completion of discovery—i.e., the point in time at which the employees should have realized that their claims were frivolous and the lawsuit should have been voluntarily dismissed. Because the record is not clear on this issue, the district court should ensure on remand that the total attorney-fee award excludes fees incurred before the point in time when the individual employees should have known that their claims were frivolous. We presume that, for most of the employees, this point in time occurred at the close of discovery. But the district court should make a clear finding, for each of the individual employees, to determine whether this presumption is correct.”

Finally, the Court also remanded so that the district court could consider re-allocating a greater portion of the fee sanction against the plaintiffs’ attorney. “Our review of the record suggests that the fault for bringing the groundless claims in this case lies principally with Attorney Frost and not with her clients. Indeed, Frost graciously conceded during oral argument that, if there is anyone to blame for the litigation, she should be the one and not her clients. Frost’s concession tempts us to simply instruct the district court to reverse the imposition of any liability against her clients under § 1988.” However, because clients selected the attorney to be their agent, they remain responsible for the actions of their attorney. Moreover, the court did not want the Defendants to lose their ability to recoup their fees in the event that the attorney became insolvent.

In affirming the frivolous nature of the no-evidence plaintiff’s claims as a sufficient basis for imposing sanctions, the Sixth Circuit rejected the plaintiff’s arguments that the CCJC had previously lost a discrimination claim and there was some evidence to support the claims of the insufficient evidence plaintiffs. The court rejected the plaintiffs’ arguments because the no-evidence plaintiffs failed to “establish[] a clear nexus between themselves” and the prima facie evidence of the insufficient evidence plaintiffs and ruling in their favor “would encourage frivolous “me-too” claimants to piggyback on the nonfrivolous claims of legitimate plaintiffs.” The court also refused to permanently bar every “employer who has lost a discrimination claim . . . from recovering attorney fees against subsequent frivolous claimants” because the plaintiffs failed to “present[] relevant evidence deriving from [the] prior successful jury verdict against the CCJC.”

Insomniacs can read the full court opinion at