Saturday, November 24, 2012

Court of Appeals of Colorado Overturns Jury Verdict on Abuse of Process Counterclaim

Employees aren't equipped with an overwhelming array of weapons to fight back anticompetitive lawsuits.

I have written many times on this blog about this topic. In this author's view, the legal system works most efficiently when parties can rely upon contract law to allocate rights and responsibilities with some predictability. Though non-competes are restraints of trade, they should be struck down only when patently overbroad and when the objective intent from the contract language is to deter fair competition.

I also believe that trade secrets law is a species of property law, and that if an employer can demonstrate a taking of protected (that is, valuable and secret) property, the law should honor that. But in the absence of protection efforts that place a third-party on objective notice that the property is truly something that is "secret", trade secrets law can be a destructive, overused weapon between competitors that disrupts parties' reasonable expectations in dealing with each other.

Employees sometimes assert abuse of process counterclaims when faced with a competition lawsuit appears to be filed as an end in itself - not as a means to an end. Abuse of process claims are tough to prove, but generally require the employee to show three things:

(1) an ulterior purpose to the suit;

(2) actions by the employer that are not proper in the course of the lawsuit; and

(3) damages.

There's another hurdle to clear, though, when an abuse of process counterclaim is based on the idea that the lawsuit itself is not proper. It's called the "sham litigation" exception, because lawsuits generally are protected by the First Amendment's clause enabling parties to petition the government to redress grievances. The sham litigation exception to First Amendment immunity further requires a counterclaiming party to show an objectively baseless suit brought in bad faith.

A recent Court of Appeals ruling in Colorado reversed a district court's jury verdict in favor of ex-employees who each obtained a $200,000 judgment on an abuse of process counterclaim. The problem that the district court made was not assessing the sham litigation exception properly on a post-trial motion by the employer. Instead of assessing whether the employer's competition claims were objectively baseless and devoid of factual support, it held a reasonable jury could have found for the employees on their counterclaim.

This conclusion missed the mark, since the court - not a jury - must pass on the First Amendment constitutional issue. Interestingly, Colorado rejected a bright-line gatekeeper rule. Specifically, it found that just because an employer's competition claims survive summary judgment does not mean the abuse of process counterclaim automatically fails. The court noted that trials may often be more efficient than resolving summary judgment motions, and that summary judgment denials often don't contain the type of exacting analysis that would automatically dispose of an abuse of process counterclaim.

One issue that is not discussed in the Colorado case - or in many cases like this - is the second element of the abuse of process tort. As listed above, an employee must generally show some action "not proper in the course of the lawsuit." When the theory is that the lawsuit is a sham, it is hard to identify something concrete that is improper, such as the misuse of subpoena power. However, my view is that the sham litigation analysis subsumes the second element. If a lawsuit is objectively baseless, then the process itself - the cost of discovery, disruption in the marketplace - has been subverted entirely.


Court: Court of Appeals of Colorado, Division Three
Opinion Date: 11/8/12
Cite: Health Grades, Inc. v. Boyer, 2012  Colo. App. LEXIS 1842 (Col. Ct. App. Nov. 8, 2012)
Favors: Employer
Law: Colorado

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