Lawsuits against directors can seem very one-sided with the plaintiffs starting at bat and never having to take to the field to play defense. This may be changing as a result of a very significant decision issued last Friday by the Second District Court of Appeal in Cole v. Patricia A. Meyer & Associates, APC , 2012 Cal. App. LEXIS 671 (June 8, 2012). The Cole case is yet another installment in the continuing legal fallout from the bankruptcy of Peregrine Systems, Inc. See Friese v. Superior Court, 134 Cal. App. 4th 693 (2005), a case that I discuss in California Appellate Court Holds that the Internal Affairs Doctrine Does not Trump California's Insider Trading Law, 20 Insights 15 (Jan. 2006).
In Cole, the defendant law firms had filed a lawsuit against Christopher Cole, the founder of Peregrine. He ultimately prevailed on a motion for summary judgment, a ruling that was upheld in Bains v. Moores, 172 Cal.App.4th 445 (2009). Turning the tables on the attorneys who had filed the suit in Bains, Cole filed a complaint against them for malicious prosecution and defamation. The trial court granted the now defendant attorneys' anti-SLAPP motions. "SLAPP" is an acronym for Strategic Lawsuit Against Public Participation. Under Code of Civil Procedure section 425.16, a cause of action arising from a defendant's act in furtherance of a constitutionally protected right of free speech may be stricken unless the plaintiff is likely to prevail on the merits.
California courts follow a two-part analysis of anti-SLAPP motions. First, the court determines whether the defendants have made a threshold showing that the challenged cause of action arose from protected activity. Second, the court decides whether the plaintiff has demonstrated a probability of prevailing on the claim. The Court of Appeal, reviewing the trial court's order de novo, concluded that Cole had shown the requisite likelihood of prevailing on his malicious prosecution claim. To succeed in a malicious prosecution case, the plaintiff must show that the case in which he was an erstwhile defendant was:
- commenced by or at the direction of the defendants and was terminated favorably as to the plaintiff (in this case, Cole);
- brought without probable cause; and
- initiated with malice.
The Court of Appeal's opinion has much to say about both probable cause and malice. What I found most interesting, however, was the role of an independent investigation commissioned by Peregrine's Board of Directors. That investigation, conducted by Latham & Watkins, found no evidence that the outside directors knew of management's fraudulent practices. The existence of this report together with the dearth of any evidence of actual investigation by the defendant attorneys and "their apparent tendency to exaggerate" proved sufficient for Cole to overcome their anti-SLAPP motion.
For other posts discussing the use (or misuse) of anti-SLAPP motions in the corporate and securities litigation context, see: