Ohio Supreme Court Adopts “Objectively Baseless” Test for Sham Litigation Claims
Antitrust, Competition & Distribution Update
Date: September 28, 2012
The Supreme Court of Ohio held in American Chemical Society v. Leadscope, Inc., decided September 18, 2012, that a party seeking to recover damages for unfair competition based on a legal action must show not only that the defendant had a subjective intent to injure the party, but also that the litigation was objectively baseless. In affirming a jury verdict for unfair competition, the court adopted the U.S. Supreme Court's test for liability for sham litigation under the antitrust laws. The decision resolves uncertainty about how claims of unfair competition based on malicious litigation are to be evaluated under Ohio law.
The Trial Court
The American Chemical Society (ACS) is a nonprofit corporation that promotes the advancement of professional chemists and the chemical sciences through publications, meetings, education and other activities throughout the world. ACS sued several of its former employees and their new company, Leadscope, Inc., (collectively, Leadscope) for allegedly stealing technology from ACS. Leadscope counterclaimed, alleging that ACS brought the litigation in bad faith with the intent of destroying it. Leadscope claimed that ACS had engaged in unfair competition by filing the action, alleging malicious litigation.
Following a trial in the Franklin County Court of Common Pleas, the jury rejected ACS's claims for breach of contract and trade secret misappropriation and returned a verdict for $26.5 million in damages on Leadscope's defamation, tortious interference and unfair competition counterclaims. The trial court denied ACS's motions for judgment notwithstanding the verdict, new trial and remittitur.
ACS argued in post-trial motions that for Leadscope to succeed on its malicious litigation claim, ACS's contract and trade secret claims must have been objectively baseless and that they could not have been objectively baseless because they were submitted to the jury. The trial court disagreed and instructed the jury that "if you find by the greater weight of the evidence that Plaintiff has committed malicious acts by way of litigation in the courts, or if you find litigation was not founded upon good faith, but was instituted with the intent and purpose of harassing and injuring a rival engaged in the same business you should find for the Defendants on their counterclaim of unfair competition."
The Court of Appeals
ACS appealed the judgment. The Tenth District Court of Appeals upheld the jury's verdict and affirmed the lower court's application of a "subjective bad faith standard" for malicious litigation, rejecting ACS's argument that Leadscope had to prove that its claims were objectively baseless.
The Supreme Court
The Ohio Supreme Court disagreed with a liability test limited to proof of bad faith. It considered the so-called Noerr-Pennington doctrine, established by the U.S. Supreme Court in its 1961 decision in Eastern Railroad Presidents Conference v. Noerr Motor Freight and its 1965 decision in United Mine Workers v. Pennington, under which a person or firm is shielded from antitrust liability if its conduct constitutes petitioning or other First Amendment activity. In Professional Real Estate Investors v. Columbia Pictures Industries (1993), the U.S. Supreme Court applied the Noerr-Pennington doctrine to formulate a two-part test for antitrust liability for sham litigation. It held that a plaintiff must show both an objectively meritless claim and a subjective motivation to interfere with the business relationships of a competitor. The Ohio Supreme Court noted in American Chemical Society v. Leadscope that although the Noerr-Pennington doctrine had been developed by the U.S. Supreme Court in federal antitrust cases, it should be equally applicable to a "case involving unfair competition claims based upon malicious litigation."
Applying both its own precedent and that of the U.S. Supreme Court, the Ohio Supreme Court held that the courts "should not focus solely on a party's subjective intent, i.e., good or bad faith, when analyzing an unfair competition claim by way of malicious litigation." Accordingly, "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." The court held that the jury was improperly instructed because the jurors had been told to focus solely on ACS's subjective intent and not also to consider whether the lawsuit was objectively baseless. Despite the improper instruction, the court conducted an independent review of the record and held that Leadscope had adequately established unfair competition even under the newly formulated standard.
The Ohio Supreme Court also reviewed and reversed the judgment for Leadscope on its defamation counterclaim, holding that the statements at issue were not defamatory as a matter of law. The court also held that ACS could not be vicariously liable for the statements, which were made by counsel for ACS and described claims in the lawsuit, because there was no evidence that they had been authorized or ratified by ACS. The decision's primary importance, however, is the court's formulation of a test for liability for unfair competition based on sham litigation.