by Howard J. Klein

As if treading the tortuous path through disciplinary rules and legal malpractice claims weren’t burden enough for the attorney in private practice, the threat of a malicious prosecution claim presents another potential professional pitfall, particularly for attorneys who represent civil plaintiffs. As a “disfavored cause of action” (Sheldon Appel Co. v. Albert & Oliker, 47 Cal.3d 863, 872 (1989)), successful suits for malicious prosecution are relatively rare. Nevertheless, because the defense of a malicious prosecution suit presents a significant expense that may not be covered by most E&O policies, the mere threat of such a suit can have a “chilling effect” on the prosecution of legitimate claims, and lawyers must tread carefully, both factually and legally.

The Supreme Court of California has set the bar fairly high for proving malicious prosecution. Sheldon Appel, supra, held that a plaintiff alleging malicious prosecution, in addition to establishing that the prior action was terminated in its favor, “must prove both (1) that the prior action was brought without probable cause, and (2) that the action was initiated with malice.” Id. at 874. While the issue of malice is a question of fact, the existence or absence of probable cause is a question of law, to be determined by the court. Id. at 874-75. The standard for determining probable cause is an objective standard: “whether any reasonable attorney would have thought the claim tenable.” Id. at 886. Importantly, the Supreme Court cautioned that in applying this standard, “a court must take into account the evolutionary potential of legal principles.” Id. In other words, an attorney could assert a claim based on a novel theory of law, as long as the claim would not appear completely meritless to “any reasonable attorney.”

A recent case from the California Court of Appeal for the Second District, however, tightens the definition of a claim that a “reasonable attorney” would think “tenable,” and thus might make it easier for a malicious prosecution plaintiff to prove the absence of probable cause. Franklin Mint Co. v. Manatt, Phelps & Phillips, LLP, 184 Cal.App.4th 313 (2010) dealt with a malicious prosecution case arising out of an underlying lawsuit filed in U.S. District Court by the Trustees of the Diana, Princess of Wales Memorial Fund (“the Fund”) against Franklin Mint. The court stated that a lawyer is not immune from liability for malicious prosecution because the area of law is complex, but is charged with acquiring a reasonable understanding the law, and cannot assert “legal theories that simply ignore fundamental principles,” arguing for an extension, modification or reversal of existing law, where the law is “clear and well established” and “neither difficult nor mysterious.” Id. at 346. The court also found one of the claims lacked probable cause as a factual matter.

In the underlying federal lawsuit, the Fund, represented by the Manatt firm, alleged several causes of action against Franklin Mint stemming from the latter’s sale of collector plates bearing the name and likeness of Princess Di, including trademark dilution under §43(c) of the Lanham Act (15 U.S.C. §1125(c)), and false advertising under §43(a) of the Lanham Act (15 U.S.C. §1125(a)). Both claims survived Franklin Mint’s motion to dismiss, but the court granted Franklin Mint’s subsequent motion for summary judgment on both of claims (The District Court also awarded attorneys’ fees to Franklin Mint for its defense of these claims, holding that both claims were “groundless and unreasonable,” a decision upheld by the Ninth Circuit in Cairns v. Franklin Mint, 292 F.3d 1139 (9th Cir. 2002).)

In Franklin Mint’s subsequent malicious prosecution action against the Manatt firm, the Superior Court granted Manatt’s motion for directed verdict, ruling that there was probable cause for both the dilution claim and the false advertising claim, and suggesting that, indeed, the failure to assert these claims might have raised “a serious question of…malpractice.” 184 Cal.App.4th at 331. On appeal, the sole issue before the Court of Appeal was whether, as a matter of law, the Fund had “probable cause” for bringing the dilution and false advertising claims. A divided Court of Appeal reversed.

The Court of Appeal’s treatment of the dilution cause of action is particularly relevant to the issue of the legal tenability of a claim. Regarding this claim, the District Court determined that the Fund was required to show that the name “Diana, Princess of Wales” had acquired “secondary meaning” in connection with charitable and humanitarian services. In other words, the Fund needed to prove that the primary significance of the name to the public was to identify such services, rather than the Princess as an individual. The District Court had ruled that the dilution claim “had no legal basis,” because the allegation of secondary meaning was “an absurd contention.” Franklin Mint Co. v. Manatt, Phelps & Phillips, LLP, supra, at 328.

Citing Sheldon Appel v. Albert & Oliker, supra, the majority maintained that probable cause is established if, “in light of the facts known to [the accused] counsel, any reasonable attorney would have thought the claim tenable.” Id. at 333. The majority stated that the statute (15 U.S.C. §1125(c)) which establishes the dilution cause of action requires the mark or name at issue to be used as a trademark, i.e., in a manner such that it would be perceived as identifying goods or services, rather than identifying a particular individual. Id. at 334-35. The majority thus framed the issue as whether there was a tenable argument that Diana had used her name and likeness as a trademark in connection with charitable and humanitarian services. The court concluded that no reasonable attorney would have thought a legally tenable argument could be made that Diana had done so. Id. at 336. The majority further held that, even if Diana had used her name as a trademark, a claim of dilution requires a showing that the mark had acquired “secondary meaning” (as discussed above) at the time of the alleged dilution. The court held that “no reasonable attorney would contend . . . that the primary significance of ‘Diana, Princess of Wales’ was to identify the provider of charitable services rather than to identify Princess Diana herself. Thus, there was no probable cause to allege that ‘Diana, Princess of Wales’ had acquired secondary meaning. . . .” Id. at 339-40. The majority said that an attorney may not assert legal theories “that simply ignore fundamental principles on which that law is based.” Id. at 346.

Of particular note, the majority dismissed as “meritless” Manatt’s argument that the U.S. District Court’s denial of Franklin Mint’s motion to dismiss the two claims established probable cause as a matter of law. 184 Cal.App.4th 313, 346, fn. 19. “Denial of the motion to dismiss . . . . says nothing about whether Manatt’s legal theory . . . was tenable” because the court was obligated to accept the truth of the allegations in the complaint. Ibid.

The court also found no probable cause for the false advertising claim, stating that no reasonable attorney could have thought that any of the advertisements even suggested, as alleged, that all proceeds from all Princess Diana merchandise would be donated to the Princess’s charities, when, in fact, “the actual advertisements, which were attached to [Manatt’s] complaint clearly do not make the representations alleged.” Id. at 348, 350. (Indeed, it was undisputed that Franklin Mint had interpleaded all proceeds described in its advertising for distribution to charity. Id. at 352.)

To the extent that the majority opinion in Franklin Mint can be reconciled with Sheldon Appel, supra, it arguably loosens the standards for bringing a malicious prosecution action. First, as argued in the dissent, the majority’s assertion that the mere fact that a claim survives a motion to dismiss would not make it legally tenable so as to provide it with the protection of “probable cause” may be inconsistent with relevant precedent. “[N]either a defense summary judgment nor a denial of a motion for preliminary injunction in the underlying action establishes that a claim is untenable.” 184 Cal.App.4th 313, 362. (Mosk, J. dissenting; citing Jarrow Formulas, Inc. v. LaMarche, 31 Cal.4th 728 (2003).) “[A]n order overruling a demurrer—or, in federal practice, denying a motion to dismiss—establishes as a matter of law the legal tenability of a cause of action as alleged.” Id. at 364 (Mosk, J., dissenting; emphasis in original; citing Swat-Frame, Inc. v. Goldstein, 101 Cal.App.4th 613 (2002)). Second, claims that require arguments for the extension, modification, or reversal of existing law may be more likely to be deemed untenable and thus lacking in probable cause, in the face of the above-noted dictum in Sheldon Appel, supra, that “a court must take into account the evolutionary potential of legal principles.” Id. at 361 (Mosk, J., dissenting).

The lesson is that counsel representing a civil plaintiff must carefully consider how aggressively to plead and present the client’s case, both legally and factually, and must thoroughly research and analyze the applicable law, with a particular focus on any arguments contrary to well established law. Should the attorney plead too aggressively, especially where a modification, extension, or reversal law is argued, there is the risk that a cause of action will be dismissed, and thus present potential exposure to malicious prosecution. Failure to plead aggressively enough, however, could leave the attorney exposed to a malpractice claim, as noted by the trial court whose decision was overturned in the appellate opinion discussed above. Charting the perilous course between the Scylla of legal malpractice and the Charybdis of malicious prosecution has perhaps become a little more challenging.

Howard J. Klein is Partner, Klein, O’Neill & Singh, LLP, Irvine, CA.