Background

 In the airline business, pilots start their careers flying small aircraft (at low wages) and gradually move to larger aircraft (and high wages) as union seniority increases.   Therefore, a pilot’s position on the union’s “seniority list” is a very valuable asset to him or her.  Seniority accounts for a difference of many thousands of dollars in income over the course of a pilot’s career.   But in spite of best-laid career plans, a problem can arise when one airline buys another—and the respective seniority lists of each airline’s pilots are merged.  

“Date of hire” is typically the beginning point for merging seniority lists, but other factors can play in important role as well.  Airline mergers usually happen when a financially stronger airline can buy a financially weaker airline.  In such cases, pilots from the stronger airline can jockey for higher seniority position based, in part, on the relative financial strength of the airline that employs them.

Against that background, US Airways bought America West Airlines in 2005.  The respective pilot seniority lists were then merged into a single, consolidated seniority list pursuant to arbitration sponsored by the union then representing pilots’ from both airlines—the Air Line Pilots Association (“ALPA”).   

In a twist of economic fates, the acquired airline, America West, was financially stronger than the acquiring airline—US Air.  The ALPA arbitration therefore merged the pilots’ seniority lists in a way that favored the 1,900 America West pilots over the 5,100 US Air pilots, based partly on the relative financial strength of America West airlines. 

 US Air Pilots’ Strategic Success

Unwilling to accept the ALPA arbitration results, US Air pilots reached for a novel legal strategy: decertify the union that had sponsored the arbitration before the new seniority list could be implemented.  According to the thinking of this strategy, if the pilots union (ALPA) no longer existed, the merged seniority list could never be implemented.

Because the US Air pilots outnumbered America West pilots by more than half, the US Air pilots successfully decertified ALPA as the collective bargaining agent for all pilots from both airlines.

After decertifying ALPA as the pilots’ union, US Air pilots then formed a new, independent union, with a new union constitution that mandated merger of the seniority lists based on date of hire.  The new union re-merged the seniority lists, with the result that US Air pilots would be favored over the America West pilots.

America West Pilots’ Strategic Mistake

Before the new consolidated seniority list was presented to the employer, US Airlines, the America West pilots sued the new union in federal court, alleging breach of the duty of fair representation (DFR) under federal labor law.  A jury trial was held in Arizona Federal District Court.  The jury held for the America West pilots and against the new union.  Notwithstanding the jury trial and verdict, the Ninth Circuit dismissed for lack of ripeness holding, in effect, that the case was premature.

A case is “ripe” for decision: (1) when the case can be decided without considering “contingent future events that may or may not occur; and (2) when direct and immediate” hardship” will occur if a decision is not rendered—and the hardship entails more than ”possible” financial loss.

Because the DFR suit was filed before the seniority list was implemented, the Ninth Circuit Court ruled that the America West pilots’ claims were contingent on actual implementation by US Air, and that the alleged financial loss of America West pilots was still theoretical, not actual, and therefore no actual “hardship” had been proven.

Thus, America West pilots’ counsel made a strategy mistake by not patiently playing out the merger process before filing suit, resulting in the Ninth Circuit’s ruling that the matter was still contingent, without actual hardship, and therefore not yet ripe for decision.  As a result, the case was returned to the district court with orders to dismiss.

This case underlies the fact that the proper legal strategy is critical to any litigation effort.  US Air pilots were represented by top-flight labor lawyer, Lee Seeham.  Lee undoubtedly learned many nuances of legal strategy from his father, the legendary labor lawyer Marty Seeham (now deceased). 

The lesson here is important: complex legal strategy is a chess game.  Diverse pieces are available on the chess board, only some of which involve litigation.  A reactionary rush to the courthouse is almost never the right first step in any legal dispute.

The Ninth Circuit opinion was authored by Judge A. Wallace Tashima, and joined by Judge Susan P. Graber.  A dissenting opinion was authored by Judge Jay S. Bybee.

1. A lawsuit was filed by or at the direction of the defendant, and was pursued to a legal termination in plaintiff’s favor;
2. The prior lawsuit was brought without probable cause; and
3. The prior lawsuit was initiated with malice.

As an initial matter the Fourth District Court of Appeals, Division 3, explained:

Malicious prosecution is a disfavored action. “This is due to the principles that favor open access to the courts for the redress of grievances.” (Downey Venture v. LMI Ins. Co.) “[T]he elements of the [malicious prosecution] tort have historically been carefully circumscribed so that litigants with potentially valid claims will not be deterred from bringing their claims to court by the prospect of a subsequent malicious prosecution claim.” (Sheldon Appel Co. v. Albert & Oliker).

The present case arose from a defamation lawsuit filed by a Mr. Young against Ms. Daniels. The defamation lawsuit was terminated when discovery sanctions were ordered against Mr. Young. The present case followed: Ms. Daniels sued the attorneys for Mr. Young alleging the attorneys had brought the underlying case against her without probable cause, and with malice.

Mr. Young’s attorneys countered with a motion to strike under California’s anti-SLAPP statute, arguing that Ms. Robbins could not prove malicious prosecution against them as a matter of law. The Superior Court granted the anti-SLAPP motion, dismissing Ms. Robbins claims against the opposing attorneys. In affirming the anti-SLAPP dismissal order, the Court of Appeals traversed the three elements of a malicious prosecution claim:

Termination in Plaintiff’s Favor

Termination of a lawsuit is ordinarily a straightforward matter—but what happens if the case is terminated as result of discovery sanctions?  This occurred in the present case.

It is clear that, at least in some circumstances, the dismissal of an underlying action as a result of discovery sanctions will satisfy the favorable termination element of a malicious prosecution claim. Favorable termination rulings (in California and elsewhere) have arisen from:

• Failure to appear for deposition
• Failure to answer interrogatories
• Failure to appear at final hearing
• Voluntary dismissal
• Dismissal for failure to prosecute
• Final judgment after trial

The underlying case brought by Mr. Young against Ms. Daniels was dismissed for failure to produce documents. Finding a prima facie case against Mr. Young’s attorneys for this discovery failure, the court explained:

[W]here the record from the underlying action is devoid of any attempt during discovery to substantiate allegations in the complaint, and the court’s dismissal is justified by plaintiff’s lack of evidence to submit the case to a jury at trial, a prima facie showing of facts sufficient to satisfy the “favorable termination” element of a malicious prosecution claim is established for purposes of an anti-SLAPP motion.

Without Probable Cause

Probable cause is lacking “when a prospective plaintiff and counsel do not have evidence sufficient to uphold a favorable judgment or information affording an inference that such evidence can be obtained for trial.”

In general, a lawyer is entitled to rely on information provided by the client. But if the lawyer discovers the client’s statements are false, the lawyer cannot rely on such statements in prosecuting an action. A letter from a litigation adversary merely suggesting it disagrees with the verity of the allegations in the lawsuit is not sufficient to put the lawyer on notice of the falsity of the client’s allegations.

With Malice

The “malice‟ element relates to the subjective intent or purpose with which the defendant acted in initiating the prior action.

The plaintiff must plead and prove actual ill will or some improper ulterior motive. Improper purposes can be established where, for instance:

• the person bringing the suit does not believe that the claim may be held valid;
• the proceeding is initiated primarily because of hostility or ill will;
• the proceeding is initiated solely for the purpose of depriving the opponent of a beneficial use of property; or
• the proceeding is initiated for the purpose of forcing a settlement bearing no relation to the merits of the claim.

If the prior action was not objectively tenable, the extent of an attorney’s investigation and research may be relevant to the further question of whether or not the attorney acted with malice. However, evidence of an attorney’s possible negligence in conducting factual research is not enough on its own to show malice. The Court explained: “only those actions that any reasonable attorney would agree are totally and completely without merit may form the basis for a malicious prosecution suit.”

In the instant case, finding nothing more than the possibility of negligence in conducting its factual research, there was no possibility of showing malice against the attorneys.

Prevailing counsel in the present case was Filomena E. Meyer.

The Fourth District Court panel included: Justice Raymond J. Ikola, Presiding Justice David G. Sills and Justice Richard D. Fybel.

The Orange County Superior Court judge was Judge Andrew P. Banks.

The Court explained the phrase “principal place of business” refers to the place where a corporation’s high level officers direct, control, and coordinate the corporation’s activities, i.e., its “nerve center,” which will “typically be found at its corporate headquarters.”

The decision resolved a split in authority among the Circuit Courts of Appeal. Some Circuit Courts of Appeal had applied the “nerve center” test– other courts, including the Ninth Circuit Court, had applied a “business activity” test.

Under the discredited “business activity” test, courts decided a corporation’s principal place of business by analyzing the amount of its business activity, state by state. If the amount of activity was “significantly larger” or “substantially predominates” in one state, then that state was the corporation’s “principal place of business.”

The US Supreme Court rejected the “business activity” test in favor of the “nerve center” test:

“[P]rincipal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. In practice it should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings.

The present case involved a suit by two California citizens again Hertz Corporation, originally filed in a California state court.

Plaintiffs sought damages for what they claimed were violations of California’s wage and hour laws, and further requested class certification in behalf of all California citizens who allegedly suffered similar harms. Hertz filed a notice seeking removal to a federal court. Hertz claimed that the plaintiffs and the defendant were citizens of different States.

A Hertz declaration stated, among other things, that Hertz operated facilities in 44 States; and that California—which had about 12% of the Nation’s population—accounted for 273 of Hertz’s 1,606 car rental locations; about 2,300 of its 11,230 fulltime employees; about $811 million of its $4.371 billion in annual revenue; and about 3.8 million of its approximately 21 million annual transactions, i.e., rentals.

The Hertz declaration also stated that the “leadership of Hertz and its domestic subsidiaries” is located at Hertz’s “corporate headquarters” in Park Ridge, New Jersey; that its “core executive and administrative functions . . . are carried out” there and “to a lesser extent” in Oklahoma City, Oklahoma; and that its “major administrative operations . . . are found” at those two locations.

In the case below, the California Central District Court applied the Ninth Circuit Court’s “business activity” test, recognizing Hertz’s principal place of business as New Jersey.

In rejecting the Ninth Circuit test and remanding for further evaluation, US Supreme Court explained:

Administrative simplicity is a major virtue in a jurisdictional statute. Sisson v. Ruby, 497 U. S. 358, 375. A “nerve center” approach, which ordinarily equates that “center” with a corporation’s headquarters, is simple to apply comparatively speaking.

While there may be no perfect test that satisfies all administrative and purposive criteria, and there will be hard cases under the “nerve center” test adopted today, this test is relatively easier to apply and does not require courts to weigh corporate functions, assets or revenues different in kind, one from the other. And though this test may produce results that seem to cut against the basic rationale of diversity jurisdiction, accepting occasionally counterintuitive results is the price the legal system must pay to avoid overly complex jurisdictional administration while producing the benefits that accompany a more uniform legal system.

The opinion was authored by Mr. Justice Stephen Breyer for a unanimous Court.

In August 2007, Oakley announced the proposed sale of its company. The pension plan shareholder thereafter filed a lawsuit to enjoin the acquisition, but dropped the case when Oakley made some changes to its final proxy statement. The shareholder then asked for attorneys fees, claiming it was the “catalyst” that caused changes to the proxy statement, to the “substantial benefit” of the other shareholders.

Because there was no settlement or court judgment, the shareholder’s fee claim arose under a “catalyst theory,” which allows for attorney fees, even when litigation does not result in a judicial resolution, if the defendant changes its behavior substantially because of, and in the manner sought by, the litigation. See, Trope v. Katz ; Code Civ. Proc., § 1021.

The trial court denied the shareholder’s claim for an award attorney fees, and the California Court of Appeals, Fourth District, affirmed, explaining:

[A] shareholder cannot claim unjust enrichment on a catalyst theory where it failed to provide pre-suit notification to the company. In suing first and asking for changes later, the shareholder failed to comply with an elemental equitable precept: that one who seeks equity must do equity.

Awarding attorney fees for litigation when those rights could have been vindicated by reasonable efforts short of litigation does not advance that objective and encourages lawsuits that are more opportunistic than authentically for the public good. Lengthy pre-litigation negotiations are not required, nor is it necessary that the settlement demand be made by counsel, but a plaintiff must at least notify the defendant of its grievances and proposed remedies and give the defendant the opportunity to meet its demands within a reasonable time.

Here, plaintiff waited until nearly four weeks after filing its amended complaint to send a letter to Oakley’s board regarding its concerns. The Court of Appeals therefore rejected plaintiff’s claim that the Oakley shareholders were unjustly enriched by the “benefits” they supposedly received from plaintiff’s lawsuit because plaintiff never made any effort to forward its suggested revisions to management before filing its complaint.

It is, however, important to note that the California Supreme Court, in Vasquez v. State of California , declined to adopt a categorical pre-suit notification requirement to attorney fee claims arising in non-catalyst cases which resulted in a judgment or settlement. But even for non-catalyst cases, Vasquez noted that a court, in considering whether to exercise its equitable powers to award still properly takes into consideration whether the party seeking fees attempted to resolve the matter without litigation.

In the high-stakes game of class action litigation, the lesson here is to be reasonable in trying to settle a case before litigation.

Prevailing counsel in the case were Eric S. Waxman and Peter B. Morrison.

The California Court of Appeals, Fourth District, panel included: Justice Richard M. Aronson, Justice William W. Bedsworth and Justice Raymond J. Ikola.

The Orange County Superior Court judge in the case below was Judge Gail Andrea Andler, Dept. CX102.

Based on this ill-advised videotape recordings scheme, the trial court entered judgment in favor of Geragos $2 million in compensatory damages $8 million in punitive damages against Borer, and $16 million in punitive damages. The Court of Appeals, however, thought this amount was far too much.

While explaining that plaintiffs had good reason to be very upset about Borer’s outrageous and illegal conduct, the Court explained that: “the amount of compensatory damages awarded went far beyond any reasonable amount in light of the evidence presented.”

The most serious gap in plaintiffs’ evidence is that there was virtually no evidence that anyone actually viewed the videotape. There was no evidence, however, that Borer used the videotape or plaintiffs’ likeness for commercial purposes, i.e., on or in products, merchandise, or goods, or for purposes of advertising or selling, or soliciting purchases of, products, merchandise, goods or services. Defendants did not sell the videotape or make profits from the videotape or use it to their advantage in any manner.

The appeals court gave Geragos two options: (1) a new trial on the proper amount of damages; or (2) reduction of damages to $100,000 compensatory damages and $400,000. Likewise, Geragos’ law partner, Eugene Harris, was given the option of a new trial or reduction of the compensatory award to $50,000 and the punitive award to $200,000.

In analyzing the proper amount of punitive damages under State Farm Mut. Automobile Ins. Co. v. Campbell, the Court of Appeals found that Borer’s misconduct was sufficiently reprehensible to warrant punitive damages. There was abundant evidence that Borer acted with malice, that is, he engaged in despicable conduct with a willful and conscious disregard of the rights of others. The right violated here was the right of plaintiffs to engage in confidential communications without a third party unlawfully recording such communications.

Most of the reprehensibility factors, however, weigh against a high punitive damages award. Borer’s conduct did not endanger the health or safety of others and did not cause any physical harm, though plaintiffs were embarrassed and upset. The target of Borer’s conduct–Michael Jackson and his lawyers— were not financially vulnerable. Rather, Jackson was sufficiently wealthy to charter a private airplane and his lawyers were sophisticated and presumably well-compensated professionals. Further, there was no evidence of repeated misconduct by Borer; this appears to be an isolated incident.

Under the totality of the circumstances, the reprehensibility of Borer’s conduct was found not to be particularly egregious, compared to other conduct that justifies punitive damages.

Even though the case was not officially published, it nevertheless reflects the latest in an ongoing effort by California appellate courts to rein in the amount of punitive damages awards. See, Punitive Damages and Agency Limitations.

This hardship defense can be particularly important to a business owner facing declining revenues, but increasing pressure from the landlord to maintain existing lease obligations.  Many companies signed a commercial lease expecting revenues that are no longer realistic in the current economy.  As we move into the year 2010, it is not unusual for a company’s revenue to be down by 60% to 70% from 2007 levels.  Lease payments are increasingly difficult to maintain for many companies as rent becomes a growing percentage of monthly expenses.  Unfortunately, lease defaults are becoming more common.

California business owners should be aware that the “hardship” defense under CCP §1179 can, in appropriate circumstances, be a lifesaver for the business.  When a landlord seeks forfeiture of a lease, the tenant can petition the court to restore the lease on more equitable terms, on account of the hardship.  The theory behind this defense is that unlawful detainer is inherently an equitable remedy, grounded in fairness.  Because the landlord is asking the court to treat it fairly by allowing a retaking of the leased property, the landlord must also extend basic fairness to the tenant in return.

Under CCP §1179, the court should consider the hardship, if any, to the tenant from the forfeiture; the hardship, if any, to the landlord from relieving the tenant from the forfeiture; the willful or other character of the breach; and then use its best discretion in determining whether hardship relief will be granted.  See, Thrifty Oil Co. v. Bartase (Cal.App.1985).

Small businesses can usually show that lease forfeiture, if allowed by the court, would kill its entire business.  The court specifically took this factor into account in Gill Petroleum, Inc. v. Hayer (Cal.App.2006).  The court noted in Gill Petroleum that:

“[I]t is obvious that if defendants forfeit their lease, then the business, as a going concern, will be kaput. Defendants purchased the business as a going concern for $626,965, and then expended significant additional sums on such things as improvements and equipment.[Defendant] declared that if they forfeit the lease, then, with the exception of their liquor license and whatever fixtures and equipment that could be salvaged, their investment would be completely lost.”

In ruling in favor of the tenant, the Gill Petroleum court held that “[t]he evidence establishes that if defendants forfeit their lease, they will lose the business which is their primary source of income and into which they invested substantial time and money; and they will be left with substantial debt. That is significant and manifest hardship.”

Thus, where a company entirely depends on its leased location to operate, and has made material premises improvements needed by the business, a court will likely be sympathetic to the hardship defense in the event of a landlord’s unlawful detainer action.

But CCP §1179 is not a blanket panacea, and it should only be used in cases of clear hardship. The statute requires full payment of rent due so far as practicable, but the court has broad equitable discretion to determine the conditions of payment and performance of other conditions.  Importantly, while §1179 mandates full payment of rent due, it does not make the court require the tenant to pay other sums such as, e.g., security deposit amounts.

Written commercial lease provisions usually appear “black and white,” ostensibly giving complete control to the landlord.  But business owners should be aware that forfeiture provisions must also be exercised fairly under California law.  The hardship defense to a landlord’s forfeiture threats is a very real option in this day and age where many business owners are struggling to just keep the business open.

The trial record showed that McKesson had over 20,000 employees and that the supervisor in question worked at a local distribution center supervising a total of only four other employees. Based on this record the California Supreme Court ruled that “the record here does not support the conclusion that [the supervisor] exercised broad authority or that she was a “managing agent” for purposes of awarding punitive damages under Civil Code section 3294, subdivision (b).” Therefore, in reviewing the jury’s punitive damages award against McKesson, the Court looked to what McKesson’s more senior managers knew and did.

Plaintiff met with two of McKesson’s midlevel managers and told them of her supervisor’s ongoing harassment. That McKesson thereafter continued to employ the supervisor without taking any corrective measures indicated a “conscious disregard of the rights or safety of others” (Civ. Code, § 3294, subd. (b)), thus warranting punitive damages. Nevertheless, the evidence establishing corporate wrongdoing in regard to the supervisor’s unlawful harassment did not indicate any repeated corporate misconduct. There was no evidence, for example, that the supervisor’s harassment was the product of a corporate culture that encouraged similar supervisorial conduct. Rather, the Supreme Court found, the harassment appeared to be isolated actions of a single supervisor, combined with the one-time failure on the part of employer McKesson to take prompt responsive action when these events came to its attention.

The California Supreme Court then reviewed the due process standard for awarding punitive damages imposed by the US Supreme Court in State Farm v. Campbell, which includes the following three factors: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

The California Supreme Court then reviewed recent cases in California that had resulted in larger punitive damages awards based on an express finding of “oppressive, fraudulent or malicious conduct”:

 In Romo v. Ford Motor Co. (Cal.App.2003), the defendant mass-produced and sold a vehicle it knew to be designed in a way that was inherently dangerous to human life; three people died; three others were injured; punitive damages: $23,723,287;

 In Rufo v. Simpson (Cal.App.2001), tthe defendant maliciously stabbed and killed two people; punitive damages: $25 million;

 In Weeks v. Baker & McKenzie (Cal.App.1998), a partner of the defendant law firm put his hand in the breast pocket of his secretary’s blouse, made a grabbing gesture toward her breasts, touched her buttocks, and made sexually harassing statements; the defendant law firm was aware of numerous prior incidents of severe sexual harassment involving the same partner; punitive damages: $3.5 million.

At the end of this review process, the California Supreme Court reasoned that because the McKesson’s failure to take corrective action against its supervisor was a one-time failure, the company’s conduct evidenced a low degree of reprehensibility under the State Farm v. Campbell test, and did not exhibit oppression, fraud or malice that would be required for a large punitive award. With a low degree of reprehensibility and without oppression, fraud or malice, the punitive damages award against McKesson could be no greater than a 1:1 ratio with compensatory damages (which were held to be $1.9 million), and the Court reduced the jury’s punitive damages award from $17 million to $1.9 million.

This case continues an ongoing trend of reducing corporate liability for punitive damages as initially established by the US Supreme Court in State Farm v. Campbell.