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.