Merit decision. Am.Chem. Soc. v. Leadscope. Thumbs Up on Unfair Competition Claim; Thumbs Down on Defamation Claim.

Update: According to an October 5, 2012 post on the ACS website, this case has been settled for $22,633,377.00. My thanks to attorney John F. Marsh of Hahn Loeser for calling this to my attention.

On September 18, 2012 the Supreme Court of Ohio issued a merit decision in Am. Chem. Soc. v. Leadscope, Inc., 2012-Ohio-4193.  I’m going to call this the most awaited decision of the year. It’s got some David v. Goliath elements to it.  It’s been pending for over a year—it was argued last September 7. And the decision is fascinating. Chief Justice O’Connor wrote the majority decision, but there was lots to say by others, particularly  Justice Pfeifer.  So come along for the ride. Warning—long post.

The Players

All of this is from the Court’s decision.

ACS is the world’s largest scientific society with over 164,000 members.  It describes itself as “one of the world’s leading sources of authoritative scientific information.”  It is chartered by the U.S. Congress. It has 1900 employees.

The largest division of ACS is Chemical Abstracts Service located in Columbus Ohio. Chemical Abstracts produces comprehensive databases of chemical information that are accessed by scientists and researchers. The long saga of this case began when three Chemical Abstract scientists began working on a software tool known as PathFinder that was supposed to make it easier for researchers to access and organize all the information in ACS’s databases. But Chemical Abstracts stopped work on PathFinder, to the disappointment of the three scientists. They left Chemical Abstracts to form their own company—Leadscope—to develop their own software product. Leadscope applied for and received a patent for its software.

The  Falling Out

Robert Massie is the President of Chemical Abstracts, and reports to the executive director of ACS.  Massie got worried that the departing scientists might have appropriated his company’s intellectual property.  ACS learned about the patent. ACS marshaled its troops.  Its Board of Directors approved legal action against Leadscope if necessary. CAS’s people met with Leadscope’s people. ACS demanded that Leadscope pay it $1 million and hand over its patent.  That didn’t happen. Leadscope was operating on a shoestring at the time. ACS filed a suit in federal court against Leadscope and the three scientists personally. (collectively, “Leadscope”)

The Memo and the Newspaper Article

On the day the lawsuit was filed, Michael Dennis, the legal administration manager for Chemical Abstracts, and another manager, circulated an internal memo to all ACS staff about the lawsuit.  The memo stated that the ACS was acting to protect its intellectual property and proprietary information. The memo advised staff members not to comment on the matter.

Ten days later the Columbus Business First newspaper published an article about the lawsuit.  ACS’s outside counsel said this in the article:

“Our motivation in filing suit is to acquire back the protected information that they took from us.” Leadscope’s people responded that the lawsuit had no merit and that the timing was suspect.

The state lawsuit

ACS dismissed its federal court case and refiled it in the Franklin County Court of Common Pleas.  Pertinent to this appeal are ACS’s claim for misappropriation of trade secrets and Leadscope’s counterclaims for unfair competition by way of malicious litigation,  and defamation and tortious interference with business relations.   The jury found against ACS on the misappropriation of trade secrets claim,  and found in favor of Leadscope on its counterclaims for defamation, tortious interference, and unfair competition.  Leadscope  and the scientists were awarded a total of $26.5 million in compensatory and punitive damages. The trial court denied ACS’s post verdict motions.  The Tenth District Court of Appeals affirmed the jury verdict in all respects, and upheld the trial court’s rulings on the post verdict motions.

On to the Heart of the Matter

Unfair Competition by way of Malicious Litigation.

The jury instruction on the unfair competition claim focused solely on whether ACS had brought its lawsuit in bad faith.  The Court of Appeals agreed that malicious litigation can be the basis for an unfair competition claim in Ohio and that bad faith is the proper standard in evaluating such a claim.

The first key finding by the Ohio Supreme Court is that in order to state a claim for unfair competition, the complaining 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.” It took this two part test from a federal anti-trust case, Professional Real Estate Investors Inc. v. Columbia Pictures Industries, Inc. 508 U.S. 49 (1993).

OK, Here’s Where Things Get really Interesting

So the Court held that to establish an unfair competition claim based on malicious litigation, a party has to 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. But the Court also held the jury instructions that were given were inadequate because they failed to include the “objectively baseless” element.

The question you should be asking is, ok, then how is it that the Supreme Court upheld the jury verdict on the unfair competition claim if it found that the jury wasn’t properly instructed on it?

 By Judicial Activism, Pure and Simple (the Good Kind)

And the answer is, “although the jury should have been instructed on the ‘objectively baseless’ standard, there is overwhelming evidence to support the jury’s verdict against ACS. ” says the majority opinion.

Yep.  The majority evaluated all the evidence itself and decided Leadscope should win. Kinda like the old 13th juror thing, from the old days of criminal law.  In fact, Chief Justice O’Connor was merciless in evaluating the quality of ACS’s evidence.  She first found that ACS had totally insufficient evidence on its own misappropriation claim, which she characterized as “astonishing” considering the length of the trial and the amount of discovery.  She noted that ACS’s own expert failed to make a convincing case for misappropriation.  Here’s the nitty-gritty:

“On the testimony and evidence presented, ACS failed to prove that it had any, let alone sufficient, evidence to support its lawsuit. The record is replete with ACS’s speculation, surmise, and supposition, but wholly lacking of probative evidence from which a rational jury could conclude that misappropriation actually occurred. The jury could reasonably infer, based on the paucity of evidence presented, that the lawsuit was objectively baseless when filed.”

By contrast, O’Connor found Leadscope’s evidence that ACS had intent to harm its business as its motivation for filing the lawsuit very persuasive.  And she went into great detail on this point as well.

One More Step

So, if the jury got the wrong charge, and the high court adopts a new legal standard, shouldn’t the case go back for a retrial?  Usually, but not always, says this conservative jurist.  In this one, we’re the decider:

“ Although the jury’s determination was made using the “bad faith” standard, the evidence presented was so lacking that even if the “objectively baseless” standard had been applied, the outcome would have been the same. We reach our determination with great respect to a jury’s role in the judicial process, but we also recognize that a court of last resort may decide the merits of a case when it adopts a new legal standard. That result is proper here, given the nature of the claims presented and the fact that a decade has elapsed since the lawsuit was filed. When an appellate court “adopts a new legal standard * * * on * * * [some] occasions, it applies the new standard itself and decides the merits.”  (citation omitted).

Time to Stop for a Count

All of the Justices except Pfeifer agreed with the newly-articulated test for unfair competition.  But Justices Stratton, O’Donnell, and Cupp weren’t feeling quite so activist about the outcome.  They all thought the case should be remanded for retrial on the unfair competition claim.  (example, from Justice Cupp-“I am unable to agree, however, that the jury’s determination on this claim can be affirmed as a matter of law upon this court’s own review of the record in our application of the correct standard.”)

Is it 3-3? Justice Pfeifer didn’t agree with the new test for unfair competition.  He disagrees that objective baselessness has ever been part of malicious litigation law in Ohio.  He did agree, however, that Leadscope had proved its case for unfair competition under the standard the majority announced. He also agreed that the court of appeal’s judgment on the unfair competition claim should be affirmed.  He made a number of technical appellate nicety points about why the jury verdict should be upheld without even addressing ACS’s points about malicious litigation. So that’s four votes for keeping the verdict on the unfair competition claim, but not all for the same reason.

The Defamation Claim

Leadscope had also won a verdict on its defamation claim against ACS but the Court took that one away. Defamation is publication of a false statement with some degree of fault (e.g. knowingly or recklessly) which injures a person’s reputation or injures the person in his or her business.  Usually in defamation cases the defendant is the media, but not in this case.

A majority found that the two publications Leadscope deemed to be defamatory—the internal memo and the comments in the Business First newspaper by ACS’s lawyer, were not defamatory as a matter of law.  The Court found that read in context the internal memo was nothing more than an explanation about the lawsuit and a directive to employees not to talk about it.  Nothing defamatory there.  It also found that the newspaper article was a balanced presentation of the views of both sides, and a true and accurate summary of the pending case.  Nothing defamatory there either.  The Court reminded one and all that within the constraints of the Rules of Professional Conduct, lawyers are free to talk to the media and the public about their cases, although of course they cannot defame others while doing so.

Another Step into Activism

The Court noted that ACS had been held liable for statements made by its outside counsel to the press.  The Court has never had to decide the issue of whether clients are liable for the statements of their lawyers, but decided to in this case, as a matter of first impression.  This is known in the trade as vicarious liability—something my first year torts students are just learning about—you are stuck for someone else’s torts, just because of the nature of the relationship between you.  In this case the Court held, with what it found to be the better reasoned  weight of authority elsewhere,  that a client can be vicariously liable for the torts of its attorney only if the client authorized or ratified the lawyer’s conduct. But this issue never came up at trial. The jury was never instructed about whether to decide if ACS was liable for its lawyer’s torts. There was no evidence that it had ratified or authorized the statements.  And furthermore, the Court held that the statements weren’t defamatory as a matter of law. So all of this was a non-issue.  But the Court decided it anyway, and this finding is part of the syllabus. It’s for future use.  The trial court was ordered to vacate the defamation judgment in favor of Leadscope.

Chief Justice O’Connor was joined by Justice McGee Brown, Lanzinger, Stratton, and O’Donnell on the defamation claim.

Justice Pfeifer’s dissent on the defamation claim.

 Justice Pfeifer wrote a passionate dissent on the defamation claim.  He would allow the jury verdict to stand on this claim.  He would find that with both the employee memo and the Business First Article, the statements made by ACS were false, made knowing they were false, and injured the reputation of Leadscope and the individual scientist defendants.  He took issue with the majority’s characterization of the Business First article as balanced, finding it “a novel approach to defamation law that if the victim denies the defamatory statement, the defamer is shielded from liability…”  He also discussed the limits of the qualified privilege of fair comment on matters in a pending lawsuit, which can be, and in his view was, overcome by actual malice in this case.

Here’s some of the flavor of his dissent:

“ACS, “one of the world’s leading sources of authoritative scientific information,” announced to an audience that included the scientific world and the financial world that virtually everything that Leadscope was built upon was stolen. A few words to the right audience can be ruinous. And the jury determined that those words were ruinous to Leadscope, Blower, Johnson, and Myatt. The majority has not demonstrated why those jury verdicts should not stand…”

“ACS levied the most serious accusation that can be brought against an inventor: you stole your invention. For the majority to determine that those words are not defamatory is unfathomable. This is not an instance where a court has been asked to determine whether a statement is simply rhetoric, satire, or hyperbole and thus not defamatory. There is no way to paint the comments at issue in this case as anything other than defamatory. There is no privilege extensive enough to protect ACS from liability for those statements.”

Justice Cupp agreed with “much, but not all” of the analysis in Justice Pfeifer’s dissent on the defamation claim. He saw a jury question as to both the memo and the newspaper article, and would uphold the jury’s determination in this case.  So the vote on the defamation claim is 5-2.

Conclusion

ACS lost its misappropriation claim.  Leadscope won its unfair competiton claim, but lost its jury verdict on defamation. How much money does that leave Leadscope?  I’m no good on math.  Someone else will have to figure that out. But it’s a big win for Leadscope, in principle. And one I applaud.

Case Syllabus

1.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.

2. 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.

3. A client is vicariously liable for its attorney’s defamatory statements only if the client authorized or ratified the statements.

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One Response to Merit decision. Am.Chem. Soc. v. Leadscope. Thumbs Up on Unfair Competition Claim; Thumbs Down on Defamation Claim.

  1. Pingback: Answers from Prof. Tom Barton, Candidate for ACS President-Elect | ChemBark

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