The California Court of Appeal, Second District, upheld the dismissal of a malicious prosecution action brought by a retailer against handbag manufacturers following the manufacturers’ dismissal of a trademark infringement and counterfeiting action against the retailer and payment of related attorneys fees.  The court upheld the dismissal despite the fact the manufacturers had submitted multiple investigative reports in the trademark infringement action which misattributed counterfeiting activity to the retailer, and the manufacturers’ investigator subsequently disavowed portions of his declaration and report.  Regardless of the submission of the erroneous evidence there were other reports and evidence sufficient to establish a triable issue of material fact.            

The Underlying Trademark Infringement and Counterfeiting Action by the Manufacturers

In 2004 the manufacturers hired a company to investigate suspected counterfeiting activity in an area of downtown Los Angeles called Santee Alley, which contains hundreds of shops, booths and stands.  Among the locations investigated was a building containing the retailer’s shop (one of eight storefronts in the building).  The manufacturers’ complaint alleged several specific instances of counterfeiting activity based on the investigative reports, and attributed some of it to the retailer’s shop.  In March 2007, after the manufacturers filed their complaint and an amended complaint, the manufacturers’ lawyers learned that two of the investigative reports mistakenly attributed counterfeiting activity to the retailer’s shop that had actually occurred at businesses nearby.

The retailer thereafter moved for summary judgment with respect to the manufacturer’s claims, arguing she did not sell or display any counterfeit merchandise.  In opposition to the motion, the manufacturers cited evidence of counterfeiting activity at the retailer’s business, including investigative reports and declarations different from those that had previously been found to be incorrect.  This included additional investigative reports and declarations by the same investigator who prepared the two mistaken reports.  The court denied the motion for summary judgment finding that triable issues of fact remained with respect to the retailer’s involvement in the sale of counterfeit merchandise.

A little over a month later the manufacturers filed a motion to dismiss the retailer from the action without prejudice, contingent on the court’s denial of the retailer’s cross-motion for attorney’s fees.  The manufacturers’ motion explained that, after bringing the action, counterfeiting activity on Santee Alley had decreased and the manufacturers desired to focus their case against the remaining landlord defendants.  The retailer’s cross-motion requested $187,000 in attorney’s fees as a condition of dismissal.

The court found that it had the discretion to dismiss the claims against the retailer at the request of the plaintiff on terms the court considered proper.  The court further found it was not required to award fees but decided an award of some fees was appropriate, but specifically excluded fees for preparing the summary judgment motion because in the court’s view the retailer’s counsel should have known the motion had no chance of success.  Because the retailer had threatened to sue for malicious prosecution the court further excluded any additional fees for work that could be used in any future litigation, and awarded the retailer a total of $75,875 in attorney’s fees and costs.  In issuing its ruling the court expressly stated that the manufacturers’ dismissal should be conditioned upon their payment of the fees and costs to the retailer but that the court was not making any findings concerning the relative merits of the parties’ claims and defenses, and did not intend for its order to have any effect on future litigation between the parties.  The fees and costs were paid and the manufacturers dismissed the retailer.

Trial against the landlord defendants continued.  At trial, the investigator who had prepared the two mistaken reports testified to the mistakes.  In cross-examination she testified to a mistake in a third report which had been one of the pieces of evidence cited by the manufacturers in their opposition to the retailer’s motion for summary judgment.  The case against the landlord defendants subsequently settled during trial.

The Retailer’s Malicious Prosecution Action: 

In August 2008 the retailer filed a malicious prosecution action against the manufacturers and their counsel.  The manufacturers and their counsel filed motions to strike under Code of Civil Procedure section 425.16.  The motions were granted and the retailer appealed.

The Appellate Court’s Analysis of the Trial Court’s Ruling in the Malicious Prosecution Action: 

The court of appeal began by noting that to establish a cause of action for malicious prosecution a plaintiff must prove the underlying action was: (1) terminated in the plaintiff’s favor, (2) prosecuted without probable cause, and (3) initiated with malice.
With respect to probable cause, the court explained that while three of the investigative reports did misattribute counterfeiting activity to the retailer, two of the mistakes were not known by the manufacturers and their counsel until after filing the amended complaint, and the third was not know until trial.  Because the evidence did not demonstrate that the manufacturers and counsel were aware of the inaccuracies in the investigative reports at the time of initiating the lawsuit, the court concluded that whatever weaknesses in the evidence later came to light, the retailer had failed to establish the absence of probable cause to bring the action.

The court further found that the denial of the retailer’s summary judgment motion, the opposition to which relied in part on investigative reports other than those that were incorrect, established probable cause.  In doing so, the court rejected the retailer’s contention that the summary judgment ruling was induced  by materially false facts.  In that regard, the court noted that the third mistaken report cited in the opposition was not the only evidence of alleged counterfeit activity, and other reports were sufficient  to create a triable issue of material fact.  Because the other reports had not been demonstrated to be false, the retailer failed to show that “but for” the mistaken evidence which was cited the trial court would have granted summary judgment.

The court also noted that the “fraud exception” to the general rule that denial of a motion for summary judgment establishes probable cause requires “knowing use of false and perjured testimony” and there was no evidence the investigator or counsel knew at the time of the summary judgment opposition that the third report cited in opposition to the motion was incorrect.  Thus the retailer had not shown that denial of the summary judgment motion was obtained by the knowing use of false testimony.

The court also rejected the retailer’s argument that continuation of the lawsuit following the summary judgment motion, once the mistakes regarding the third report were known lacked probable cause.  The court explained that discrediting some of the investigative reports regarding the retailer did not render the lawsuit against the retailer “untenable.”  Even given the three reports for which mistakes were acknowledged, three other investigative reports remained which attributed counterfeit merchandise to the retailer’s store.  The court concluded that the mistakes were not new facts that transformed the prior suit into one which was objectively without merit.  The errors weakened the case, but did not leave it without any basis.  In that regard, the court stressed that only those actions that any reasonable attorney would agree are totally and completely without merit may form the basis of a malicious prosecution suit.

With respect to the issue of malice, the court observed that consideration of the malice issue is required only if the court determines that objective tenability (i.e., probable cause) is absent.  Where an underlying claim was objectively tenable, a malicious prosecution claim fails, regardless of any evidence of malice on the part of the defendant.  The court nonetheless noted that the retailer had failed to establish malice.  Retailer’s malice argument was based on the assertion that the alleged lack of probable cause was alone sufficient to establish malice.  The court explained that even if it had been shown that the lawsuit had been filed and prosecuted without probable cause, “more” would have been required for a showing that the lawsuit was initiated and prosecuted with malice.  The court further explained that the mere fact an action lacks legal tenability, as measured objectively, without more, does not logically or reasonably permit the inference that such lack of probable cause was accompanied by the actor’s subjective malicious state of mind.

On the issue of favorable termination of the underlying action in the plaintiff’s favor, the court again noted that its conclusion that probable cause existed precluded any need to determine whether the retailer had established a favorable termination in her favor.  Nonetheless, the court explained that the evidence in the case did not support a conclusion that the voluntary dismissal by the manufacturers was a favorable termination in the retailer’s favor.  The court emphasized that the trial court had expressly stated that although it was conditioning the dismissal on payment of the retailer’s attorney’s fees it was not making any findings concerning the relative merits of the parties’ claims and defenses, and did not intend for its order to have any effect on any future litigation between the parties.  As such, the court’s disposition in the trademark infringement action explicitly did not reflect any opinion on the merits of the action.  The appellate court further pointed out that there was evidence in the trademark infringement action that the dismissal had been for tactical reasons because (1) counterfeit goods were no longer offered for sale at the retailer’s shop, and (2) the dismissal of the retailer allowed the trial to focus on the remaining landlord defendants.

The court also emphasized that the award of attorney’s fees did no require a finding that the voluntary dismissal was a favorable termination in the retailer’s favor.  Under applicable rules of procedure the trial court in the trademark infringement action was required in ruling on the motion to dismiss without prejudice to determine whether the defendant would suffer some plain legal prejudice as a result of the dismissal.  The appellate court explained that while the expense of defending against a law suit is not legal prejudice, if a court chooses it may protect a defendant’s interest by conditioning dismissal upon the payment of attorney’s fees and costs.  The court’s award of attorney’s fees thus was not a statement that dismissal was on the merits.  Rather, the court exercised its discretion under the procedural rules to protect the retailer’s interests by conditioning dismissal on the payment of attorney’s fees.

Significance of the Opinion:

This opinion highlights the significant protection afforded under California’s Anti-SLAPP statute, and the substantial legal and factual hurdles a plaintiff must overcome in order to maintain such a claim.  This includes the fact that even false or erroneous evidence may fail to establish such a claim, and that denial of a motion for summary judgment will generally establish the existence of probable cause and prevent a malicious prosecution claim regardless of any malicious intent.  Additionally, the decision emphasizes that a voluntary dismissal with prejudice, and even payment of a parties’ attorney’s fees, in the underlying action may not establish that a party obtained a favorable termination of the underlying action for purposes of asserting a malicious prosecution claim.  It also highlights the strategic value, for malicious prosecution purposes, of a party that is going to dismiss an action without prejudice making a record that the dismissal is not based on a determination of the substantive merits of the claims or defenses.