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Published in the Daily Journal - June 2004
Litigating An Employment Case For Settlement Could Prove Costly To
Plaintiffs' Counsel

By Dana Cephas

Many employment cases in California proceed like this: Plaintiff files suit, discovery is completed, employer prevails on a motion for summary judgment, and the court denies the employer's motion for attorney fees. And even if the court awards fees, the plaintiff cannot pay the award so the employer is on the hook for $100,000 in attorney fees.

The prospects for reducing the number of frivolous employment lawsuits and the employers' fate with respect to reimbursement of legal expenses for such suits may improve as a result of two recent California cases that clarified - if not expanded - the contours of a malicious-prosecution action. At a minimum, these cases (the first based on a frivolous fraud action and the second based on employment claims) provide a new weapon for employers facing meritless employment claims by shifting more of the financial risk onto plaintiffs' counsel.

In Zamos v. Stroud, 32 Cal.4th 958 (April 19, 2004), the state Supreme Court issued a unanimous opinion concluding that "an attorney may be held liable for malicious prosecution when he commences a lawsuit properly but then continues to prosecute it after learning it is not supported by probable cause."

The Court explained that "[c]ontinuing an action one discovers to be baseless harms the defendant and burdens the court system just as much as initiating an action known to be baseless from the start."

This malicious prosecution case was based on an underlying fraud lawsuit against Zamos (an attorney) by his former client. That former client claimed Zamos made misrepresentations to induce her to settle a prior lawsuit.

However, all of the former client's fraud claims were contradicted by statements Zamos made on the record during court hearings in that prior lawsuit. Stroud, the plaintiff's attorney in the fraud lawsuit, was given transcripts of those court hearings shortly after the filing of the fraud lawsuit that demonstrated he "knew or should have known that the fraud lawsuit had no merit."

Because Stroud continued to litigate the case after receiving evidence proving the case was a dog, the court held Stroud could be sued for malicious prosecution (even if he thought it was a good case when he filed the claim).

The legal landscape may change dramatically after Zamos. Before this case, an attorney in California would generally not be held liable for malicious prosecution where the claim was based on the continuation of a "properly initiated" lawsuit. Now, an employer faced with a meritless employment discrimination action can educate the plaintiff's attorney during discovery and establish a starting point for the "continuation" of the meritless action.

For example, the employer can take the plaintiff's deposition and then, if the plaintiff has failed to substantiate his/her claims, send a copy of the transcript to the plaintiff's attorney highlighting the testimony that warrants dismissal of the plaintiff's claims.

The Zamos Court agreed that "[h]olding attorneys liable for the damages a party incurs * after [the attorneys] learn the claims have no merit also will encourage voluntary dismissals of meritless claims at the earliest stage possible." As a result of the Zamos decision, plaintiffs' counsel will no longer be able to hide behind the claim that they believed a lawsuit had merit when it was filed.

They will have to prove that a "reasonable attorney" faced with the same facts would have continued to believe in the client's claims throughout the pendency of the lawsuit.

The other recent malicious prosecution case of significance, Siebel v. Mittlesteadt, 118 Cal.App.4th 406 (May 6, 2004), arose from an employment case decided by the California Court of Appeal, 6th District, and relates to the improper joinder of managers or corporate officers as individual defendants.

In the underlying employment case (containing 10 causes of action based primarily on wrongful termination, discrimination and wage claims), the plaintiff sued her former employer, Siebel Systems, Inc., and also named the company's CEO, Thomas Siebel, as a defendant. The Company and the CEO defeated most of the plaintiff's claims before trial and certain other claims were voluntarily dismissed, but the plaintiff proceeded to trial on her remaining claims and won $233,000, plus attorney fees for unpaid commissions. Significantly, the CEO defeated the only claims that remained against him during the trial and was granted costs.

The parties appealed, but before any appellate ruling, the parties reached a settlement and dismissed their appeals. However, the settlement provided that the CEO was not prevented from pursuing claims against the plaintiff's attorneys. Not surprisingly, the CEO later sued those attorneys for malicious prosecution.

The trial court dismissed the CEO's action, but the 6th U.S. District Court of Appeals reversed and concluded that the CEO could pursue his claims for malicious prosecution with respect to his status as a defendant in the underlying employment claim, even though the plaintiff ultimately walked away with $300,000 from the corporate defendant.

The appellate court reinstated the malicious prosecution action with respect to three causes of action in the original lawsuit because at the time the complaint was filed in July 1996, "there was no legal basis for a wrongful-termination lawsuit against supervisors, managers, or officers of a corporate employer."

Significantly, the Siebel court confirmed that the CEO's malicious prosecution case could go forward even "where only one of several claims in the prior action lacked probable cause." However, it is unclear whether the court would have reached this conclusion if the plaintiff had succeeded in any of the remaining claims against the CEO.

In light of Zamos and Siebel, employers - often seen as the deep pocket - should consider reaching into the pockets of plaintiffs' counsel when it becomes obvious that counsel has brought (or has continued to litigate) frivolous employment claims, especially if a supervisor or corporate officer is improperly named as an individual defendant.

In order to maximize the potential benefits that have been defined by these two recent malicious-prosecution decisions, counsel for employers must take certain steps to put plaintiffs' attorneys on notice as early as possible of potential meritless claims.

As always, depositions of the plaintiffs and/or plaintiffs' witnesses should be conducted at soon as possible. If those transcripts show claims against the company and/or individual defendants are frivolous, copies or summaries of those transcripts should be sent to plaintiffs' counsel with a demand for dismissal of those claims. This should be done before legal costs are incurred preparing for summary judgment.

And the dismissal demands should be renewed as additional discovery reveals further flaws in a plaintiff's case.

In certain cases - for example, where it appears that there is no basis for certain claims or naming individual defendants - demands for dismissal should be sent to plaintiffs' counsel before preparing a demurrer or incurring any discovery expenses. Such correspondence should demand that plaintiffs' counsel dismiss inappropriate claims/individual defendants or explain the legal rationale supporting the inclusion of such claims or defendants. The plaintiffs' counsel may not respond to such demands, but he/she will risk incurring personal liability related to the costs incurred by the employer, from the date of the correspondence, if it is later shown that there was no legal or factual basis for including such claims and/or defendants.

To be fair, many employment lawsuits do have merit, and arguably provide a necessary balance to the employer/employee relationship. Nevertheless, California employers will continue to be attacked with meritless legal claims due to the perceived settlement value of those cases.

The decisions in Zamos and Siebel should help maintain a balance to the playing field and will provide a good basis for "encouraging" plaintiffs' counsel to dismiss actions (or at least dismiss individual defendants) after the employer has gathered enough evidence to educate plaintiffs' counsel. In the past, losing a motion for summary judgment simply meant that the plaintiffs' counsel would not get paid. In the future, the potential costs associated with losing at the summary judgment stage, or at trial, may cause the plaintiffs' counsel to think twice about when to bow out of a questionable lawsuit and whom they list as defendants.

After a few malicious-prosecution verdicts in employers' favor, friendly reminders to plaintiffs' counsel that the "continuation" of meritless claims could result in personal liability should cause a reduction in the litigation related to frivolous claims. As the Supreme Court explained in Zamos, the threat of such liability will encourage plaintiffs' attorneys to "serve the client's best interests in that the client will avoid the cost of fruitless litigation" and thereby avoid additional personal liability.

Thus, the lessons provided by Zamos and Siebel should ultimately benefit everyone in California, not just defendants, and the effect will not be limited to employment cases.

Published in the Daily Journal in June 2004