Opinion ID: 2690702
Heading Depth: 2
Heading Rank: 1

Heading: leadscope’s unfair competition claim

Text: A. The “objectively baseless” element is a necessary element to prove an unfair competition claim by way of malicious litigation {¶ 22} One of the most fundamental and protected rights of our judicial system is the ability of citizens to access the courts. This right is preserved in both the First Amendment to the United States Constitution and Article I, Section 16 to the Ohio Constitution. The First Amendment provides that “Congress shall make no law    abridging    the right of the people    to petition the Government for a redress of grievances.” Article I, Section 16 of the Ohio Constitution reads: “All courts shall be open, and every person, for an injury done him in his land, goods, person, or reputation, shall have remedy by due course of law, and shall have justice administered without denial or delay.” {¶ 23} Although the courthouse doors are open to all litigants, both the United States Supreme Court and this court have set limitations on the right to redress claims that are brought as a sham, to vex and annoy, or in an attempt to interfere directly with a competitor’s business relationships. In Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 56, 113 S.Ct. 1920, 123 L.Ed.2d 611 (1993), the Supreme Court recognized this limitation and held that the First Amendment right to access the courthouse does not extend to sham litigation. We too have recognized the limitation to the right to seek redress by holding: “Despite the paramount importance placed on the ability to access the courts for redress of injuries, the right is not absolute.” Greer-Burger v. Temesi, 116 Ohio St.3d 324, 2007-Ohio-6442, 879 N.E.2d 174, ¶ 11. 10 January Term, 2012 {¶ 24} Notwithstanding the limitations on claims brought as a sham, there was no clarity regarding what constituted “sham litigation” until Professional Real Estate Investors. In that case, Columbia Pictures sued Professional Real Estate Investors, Inc., “a resort hotel[,]    for alleged copyright infringement through the rental of videodiscs for viewing in hotel rooms.” Professional Real Estate Investors at 51-52. Professional Real Estate Investors “counterclaimed, charging Columbia [Pictures] with violations of    the Sherman Act    and various state-law infractions.” Id. at 52. Specifically, Professional Real Estate Investors “alleged that Columbia’s copyright action was a mere sham that cloaked underlying acts of monopolization and conspiracy to restrain trade.” Id. {¶ 25} For the first time, the Supreme Court delineated a two-part definition of “sham litigation”: First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized under [E. RR. Presidents Conference v.] Noerr [Motor Freight, Inc., 365 U.S. 127, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961) (“NoerrPennington Doctrine”)] and an antitrust claim premised on the sham exception must fail. Only if challenged litigation is objectively meritless may a court examine the litigant’s subjective motivation. Under this second part of our definition of sham, the court should focus on whether the baseless lawsuit conceals “an attempt to interfere directly with the business relationships of a competitor,” Noerr, supra, 365 U.S. at 144[, 81 S.Ct. at 533, 5 L.Ed.2d 464] (emphasis added), through the “use [of] the governmental process—as opposed to the outcome of that 11 SUPREME COURT OF OHIO process—as an anticompetitive weapon,” [Columbia v.] Omni [Outdoor Advertising, Inc.], 499 U.S. [365], 380, 111 S.Ct. [1344, 113 L.Ed.2d 382 (1991)] (emphasis in original).” (Footnote omitted.) Id. at 60-61. {¶ 26} In crafting its definition, the Supreme Court specifically rejected “a purely subjective definition of ‘sham.’ ” Professional Real Estate Investors, 508 U.S. at 60, 113 S.Ct. 1920, 123 L.Ed.2d 611. “Our decisions therefore establish that the legality of objectively reasonable petitioning ‘directed toward obtaining governmental action’ is ‘not at all affected by any anticompetitive purpose [the actor] may have had.’ ” Id. at 59. Indeed, the court held that it has “repeatedly reaffirmed that evidence of anticompetitive intent or purpose alone cannot transform otherwise legitimate activity into a sham.” Id., citing Fed. Trade Comm. v. Superior Court Trial Lawyers Assn., 493 U.S. 411, 424, 110 S.Ct. 768, 107 L.Ed.2d 851 (1990); Natl. Assn. for the Advancement of Colored People v. Claiborne Hardware Co., 458 U.S. 886, 913-914, 102 S.Ct. 3409, 73 L.Ed.2d 1215 (1982). The court also held that “even an ‘improperly motivated’ lawsuit may not be enjoined under the National Labor Relations Act as an unfair labor practice unless such litigation is ‘baseless.’ ” Id., quoting Bill Johnson’s Restaurants, Inc. v. Natl. Labor Relations Bd., 461 U.S. 731, 743-744, 103 S.Ct. 2161, 76 L.Ed.2d 277 (1983). {¶ 27} It is clear that sham litigation “contains an indispensable objective component” and, therefore, does not “turn[] on subjective intent alone.” Id. at 58, 59; see also Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500, 108 S.Ct. 1931, 100 L.Ed.2d 497 (1988), fn. 4 (private unethical action that is not genuinely aimed at procuring favorable government action is a sham as opposed to a valid effort to influence government action); Otter Tail Power Co. v. United States, 410 U.S. 366, 380, 93 S.Ct. 1022, 35 L.Ed.2d 359 (1973) (describing a 12 January Term, 2012 sham as “evidenced by repetitive lawsuits carrying the hallmark of insubstantial claims”). Thus, when courts are analyzing a claim for sham litigation, they must not focus solely on a party’s subjective intent, but must also determine whether the party’s lawsuit is objectively baseless. {¶ 28} In Greer-Burger, 116 Ohio St.3d 324, 2007-Ohio-6442, 879 N.E.2d 174, we followed and quoted the United States Supreme Court’s definition of “sham litigation” as set forth in Professional Real Estate Investors. Id. at ¶ 11. In Greer-Burger, an employee had filed a sexual-harassment suit against her employer. Id. at ¶ 2. After a trial, the jury found in favor of the employer. Id. In turn, the employer filed suit against the employee and alleged, among other things, malicious prosecution. Id. The employer argued that he had incurred significant attorney fees and costs by defending against the employee’s lawsuit. Id. {¶ 29} In response to the employer’s lawsuit, the employee “filed a sworncharge affidavit with the Ohio Civil Rights Commission (“OCRC”)” and argued that the employer’s “lawsuit was a prohibited retaliatory violation.” Id. at ¶ 3. OCRC issued an order prohibiting the employer from proceeding with his lawsuit. Id. at ¶ 6. The employer appealed to the trial court, which affirmed the OCRC’s order. Id. at ¶ 7. The Eighth District affirmed as well. Id. at ¶ 8. {¶ 30} We reversed and held, “[E]ven assuming arguendo that [the employee] has established a prima facie case of retaliation, [the employer] must be afforded an opportunity to show that there is an objective basis for his lawsuit.” (Emphasis added.) Id. at ¶ 15. We further held: [A]n employer [should have] the opportunity to demonstrate that the suit is not objectively baseless. In determining whether the employer’s action has an objective basis, the OCRC administrative-law judge should review the employer’s lawsuit 13 SUPREME COURT OF OHIO pursuant to the standard for rendering summary judgment. Thus, an employer needs to “show[] his lawsuit raises genuine issues of material fact.” [Bill Johnson’s, 461 U.S.] at 746, 103 S.Ct. 2161, 76 L.Ed.2d 277. If the employer satisfies this standard, the suit does not fall under the definition of sham litigation. The suit, therefore, shall proceed in court while the proceedings before the OCRC shall be stayed. Id. at ¶ 16. {¶ 31} Based upon our own precedent and that of the Supreme Court, courts should not focus solely on a party’s subjective intent, i.e., good or bad faith, when analyzing an unfair competition claim by way of malicious litigation, as the court of appeals in this case held.2 {¶ 32} In this case, the Tenth District Court of Appeals cited Henry Gehring Co. v. McCue, 23 Ohio App. 281, 154 N.E. 171 (8th Dist.1926), as “the seminal Ohio case adopting malicious litigation as a basis for the tort of unfair competition.” Am. Chem. Soc., 2010-Ohio-2725, ¶ 30. This was true, however, until our decision in Greer-Burger in December 2007, a mere two months before the trial commenced in this case. {¶ 33} In Henry Gehring, the plaintiff alleged that the defendant’s conduct was “of such persistent and continuous nature as has resulted in damage to the [plaintiff] in the production and sale of its wares at common law.” Henry 2. We recognize that the “sham litigation” definition set forth in Professional Real Estate Investors was created within the context of federal antitrust law. However, we find its rationale to be identical to the issue in the present case, i.e., maintaining access to the courthouse. Moreover, applying the Professional Real Estate Investors test to lawsuits outside the context of federal antitrust law is not a new concept for this court. See Greer-Burger v. Temesi, 116 Ohio St.3d 324, 2007-Ohio-6442, 879 N.E.2d 174. In Greer-Burger, an employer retaliation case, we first adopted the test in Professional Real Estate Investors. Id. at ¶ 11. Therefore, the analysis in Professional Real Estate Investors is not limited to the confines of federal antitrust law, but is applicable to cases involving unfair competition claims based upon malicious litigation. 14 January Term, 2012 Gehring at 283. The defendant argued that the allegations stated in the petition did not constitute a cause of action in state court. Id. at 282. {¶ 34} The Eighth District held: There is well-established authority for the holding that the pursuit of one competitor by another, either in court or out of court, for the purpose of injuring him in his business, may result in recovery under sufficient proof. There are numerous cases of successful recoveries because of malicious acts by way of litigation in the courts, where it appears that the litigation was not founded upon good faith, but was instituted with the intent and purpose of harassing and injuring a rival producing and selling the same commodity. Id. at 283-284. {¶ 35} Using Henry Gehring as a guidepost, the Tenth District held that “the bad faith standard is better suited to the nature of the malicious litigation claim than is the ‘objectively baseless’ standard.” Am. Chem. Soc., 2010-Ohio2725, ¶ 31. Consequently, the Tenth District held that “the trial court properly instructed the jury that litigation not founded in good faith, but brought for the purpose of harassing and injuring a rival who was producing and selling the same commodities, could support Leadscope’s unfair competition claim.” (Emphasis added.) Id. Thus, the appellate court held that “the trial court did not err in denying ACS’s motion for judgment notwithstanding the verdict on the unfair competition claim   .” Id. at ¶ 45. {¶ 36} We disagree with the Tenth District’s conclusion that the “bad faith” standard is the appropriate standard for an unfair competition claim by way of malicious litigation. In being presented with this standard, the jury was 15 SUPREME COURT OF OHIO improperly instructed to focus solely on ACS’s subjective intent. This flawed instruction did not direct the jury to consider whether the lawsuit was objectively baseless, contrary to the case law on this issue under Greer-Burger and Professional Real Estate Investors. {¶ 37} We hold that 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. Here, the jury instructions were inadequate because they did not include the “objectively baseless” element necessary to meet the two-part test for an unfair competition claim. {¶ 38} Even though we hold that the trial court failed to properly instruct the jury on Leadscope’s unfair competition claim, we find it necessary to address Leadscope’s assertion that ACS waived its claim of Noerr-Pennington immunity because immunity is an affirmative defense that must be pleaded in an answer or it is waived under Civ.R. 8(C) (affirmative defenses).3 ACS did not assert NoerrPennington immunity by name. Leadscope argues that pursuant to Civ.R. 8(C), ACS waived Noerr-Pennington immunity because it did not expressly raise it until ACS filed its motion for judgment notwithstanding the verdict.4 See Civ.R. 3. Noerr-Pennington immunity is a “doctrine [that] originated in the anti-trust context as the proposition that ‘joint efforts to influence public officials do not violate the antitrust laws even though intended to eliminate competition. Such conduct is not illegal, either standing alone or as part of a broader scheme itself violative of the Sherman Act.’ ” WE, Inc. v. Philadelphia, Dept. of Licenses & Inspections, 174 F.3d 322, 326 (3d Cir.1999), quoting United Mine Workers of Am. v. Pennington, 381 U.S. 657, 670, 85 S.Ct. 1585, 14 L.Ed.2d 626 (1965); see also Noerr, 365 U.S. 127, 81 S.Ct. 523, 5 L.Ed.2d 464. The United States Supreme Court has held, “Those who petition government for redress are generally immune from antitrust liability.” Professional Real Estate Investors, 508 U.S. at 56, 113 S.Ct. 1920, 123 L.Ed.2d 611. This type of immunity from antitrust liability is otherwise known as Noerr-Pennington immunity. 4. Many courts have held that Noerr-Pennington immunity should be raised as an affirmative defense. See Bayou Fleet, Inc. v. Alexander, 234 F.3d 852, 860 (5th Cir.2000); Acoustic Sys., Inc. v. Wenger Corp., 207 F.3d 287 (5th Cir.2000); North Carolina Elec. Membership Corp. v. Carolina Power & Light Co., 666 F.2d 50, 52 (4th Cir.1981). Even so, as the Fifth Circuit in Bayou Fleet explained, the general rule of waiver does not apply when the defense is raised later 16 January Term, 2012 8(C) (“a party shall set forth affirmatively    any other matter constituting an avoidance or affirmative defense”). {¶ 39} ACS counters that it did not waive Noerr-Pennington immunity, because it argued repeatedly for a directed verdict on the unfair competition and tortious interference claims. ACS further submits that it also argued that it was entitled to Noerr-Pennington immunity when ACS filed its objections to the trial court’s jury instructions on March 24, 2008. ACS argues that it is not required to specifically use the words “Noerr Pennington” or “First Amendment” and that its objections to the jury instructions preserved its argument for Noerr-Pennington immunity on appeal. The second and third paragraphs of its proposed jury instruction, it claims, invoked the Noerr-Pennington doctrine and the correct standard of law to provide immunity on Leadscope’s unfair competition claim. {¶ 40} The parties’ focus on the waiver issue is a red herring in this case. Here, ACS filed a lawsuit against Leadscope. Leadscope then counterclaimed, alleging, among other claims, unfair competition. As the counterclaimant, Leadscope had the burden of proving its claim for unfair competition, regardless of whether ACS did or did not plead Noerr-Pennington immunity as an affirmative defense. In Professional Real Estate Investors, the Supreme Court held: [E]ven a plaintiff who defeats the defendant’s claim to Noerr[-Pennington] immunity by demonstrating both the objective and the subjective components of a sham must still prove a substantive antitrust violation. Proof of a sham merely deprives but does not result in unfair surprise or “if it is raised at a ‘pragmatically sufficient time, and the plaintiff was not prejudiced in its ability to respond.’ ” Id. at 860, quoting Chambers v. Johnson, 197 F.3d 732, 735 (5th Cir.1999). 17 SUPREME COURT OF OHIO the defendant of immunity; it does not relieve the plaintiff of the obligation to establish all other elements of his claim. Professional Real Estate Investors, 508 U.S. at 61, 113 S.Ct. 1920, 123 L.Ed.2d 611. Therefore, the burden remained on Leadscope to prove its unfair competition claim. Noerr-Pennington immunity is a shield from liability, and Leadscope cannot escape its burden of proving its own claim by wielding the Noerr-Pennington doctrine as a sword. {¶ 41} Furthermore, independent of the question of ACS’s preservation of an affirmative defense is the question whether the trial court appropriately instructed the jury as to the standard for finding unfair competition by way of malicious litigation. That is the question we were asked to address when we accepted the cause for discretionary review, and that is the question we have answered. B. Although the jury should have been instructed on the “objectively baseless” standard, there is overwhelming evidence to support the jury’s verdict against ACS {¶ 42} Today we hold that the “objectively baseless” standard is the correct standard for an unfair competition claim based upon malicious litigation, and therefore, the trial court should have instructed the jury to apply that standard. Here, the trial court improperly instructed the jury to apply a “bad faith” standard. In affirming the use of the “bad faith” standard, the appellate court reviewed the evidence presented to the jury and held, “The jury, as trier of fact, was entitled to draw permissible inferences from the chronology, course, and scope of litigation ACS undertook and to conclude ACS’s civil action constituted malicious litigation.” {¶ 43} We, too, find it necessary to highlight certain evidence that was presented by ACS and Leadscope. 18 January Term, 2012
{¶ 44} ACS claimed that Leadscope misappropriated PathFinder. The jury was instructed that to constitute misappropriation, the information at issue must be a trade secret. The jury was also instructed that a trade secret is information that “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Although ACS never expressly argued to the jury what trade secret Leadscope allegedly took, the PathFinder source code was the only “secret” property. Indeed, the majority of the evidence adduced by ACS was focused on PathFinder’s source code. {¶ 45} CAS’s President Massie had testified at deposition that “the source code is    an extraordinarily important and central tangible item in the sense that it’s reduced to some medium.” He had also testified that he was most interested in the source code because “[t]hat is, after all, what this entire problem is about: Who created this product?” Michael Petras, a senior engineer at ACS and one of the code writers of PathFinder, testified that there was “no doubt” that the source code for PathFinder was confidential. {¶ 46} The source code was so important to ACS that it was part of its negotiations with Leadscope before this litigation. Michael Dennis, CAS’s legaldepartment manager, testified: A. We talked about the PathFinder source code and the entire PathFinder project, and we had conversations about how we believed, Pete [Roche] and I, that Leadscope had the enjoyment of the PathFinder software or source code and that as part of the settlement or resolution of this, that Leadscope should provide CAS with any enhancements that they had made to that software. Q. And when you pointed out that you thought they had the benefit of the PathFinder source code, what did these people say? 19 SUPREME COURT OF OHIO
Q. Did they ever deny having the PathFinder source code? A. No. Which left us with the impression that they had copied some form of the PathFinder software. {¶ 47} But the jury heard testimony from ACS’s own expert that the source codes for PathFinder and the Leadscope patent were not the same. Dr. Sudhakar Yalamanchili testified that “he did not find any” verbatim copying of any source code from PathFinder that was used in Leadscope. Dr. Martin Rinard, Leadscope’s expert, confirmed Dr. Yalamanchili’s conclusion that the source codes were not identical. He “looked at every line of source code and both source code bases” and concluded that Leadscope’s source code was not copied from the PathFinder source code. {¶ 48} The source code was the only part of PathFinder that was considered highly confidential. The functionality of PathFinder was not proprietary information. Petras conceded that other than the source code, documents were not subject to security procedures for the purpose of protecting confidentiality. In fact, Petras testified that the functionality of PathFinder was not secret and was described to the public in articles and in scientific presentations. The functionality of the PathFinder project was disclosed to customers through sales presentations, without the protection of nondisclosure agreements. And Lou O’Korn, head of ACS’s research department, testified that there were other products in the field that had the capabilities of the Leadscope patent and PathFinder. The functionality of PathFinder was unequivocally not a secret. {¶ 49} ACS did not provide sufficient evidence to the jury supporting its claim for misappropriation or that it had a patent on PathFinder. ACS’s only secret was the source code, and expert testimony revealed that the source codes 20 January Term, 2012 for PathFinder and Leadscope were not the same. The lack of sufficient evidence of misappropriation is astonishing, especially considering the length of this trial and the extensive nature of the discovery spanning nearly six years. {¶ 50} But the lack of evidence is even more problematic for ACS’s defense of Leadscope’s counterclaim alleging that ACS filed the lawsuit solely to injure Leadscope’s competitiveness. ACS never specified any information to support its basis for filing the lawsuit. President Massie testified that he formed a working group to investigate the patent. However, the jury never heard testimony about the results of the committee or how it reached its determination that Leadscope had misappropriated the PathFinder product. {¶ 51} Instead, there were extensive discussions out of the presence of the jury between counsel and the judge regarding Leadscope’s motion in limine seeking to introduce evidence of the conclusions of the working group. ACS successfully sought its exclusion on the basis that the information was protected by work-product and attorney-client privilege. Thus, the jury never heard testimony on the information ACS had when it filed its lawsuit to support its claims for misappropriation against Leadscope. This is relevant because in defending the counterclaim involving unfair competition predicated upon legal action, ACS was required to show that when the lawsuit was filed, it had an objective basis and was not filed simply to injure Leadscope’s ability to be competitive. {¶ 52} The evidence that ACS did present to the jury failed to establish that it possessed anything more than speculation at the time it filed its lawsuit that PathFinder had been misappropriated by Leadscope. ACS’s own experts and internal technical staff would not state that Leadscope had stolen ACS’s trade secrets. Although the experts and internal technical staff identified similarities in the patented information, no testimony established that Leadscope took ACS’s proprietary information. Instead, ACS focused its arguments on the similarities 21 SUPREME COURT OF OHIO between the source code and “operational flows.” ACS relied on those similarities as proof that Leadscope misappropriated PathFinder. {¶ 53} Dr. Yalamanchili’s testimony could not provide any insight as to what information ACS relied upon in filing its claims against Leadscope, given that he was not retained by ACS until 2007, five years after the lawsuit was filed. Dr. Yalamanchili testified that the “operational flow” of the two programs was “identical.” But Dr. Yalamanchili never clearly defined “operational flow” or why identical “operational flows” supported ACS’s claim of misappropriation. The jury never heard testimony from Dr. Yalamanchili or any other ACS expert that the operational flow constituted proprietary information. Dr. Yalamanchili even admitted he did not review any other software projects beyond PathFinder and Leadscope’s patent to determine whether other programs had the same operational flow. {¶ 54} But Dr. Yalamanchili also testified that the Leadscope patent and PathFinder were different in several ways. He testified that there was no evidence that the PathFinder source codes were the same as Leadscope’s. Additionally, the two programs were written in different programming languages. Dr. Yalamanchili also testified that the algorithms of PathFinder and Leadscope were not identical. Thus, ACS’s own expert failed to make a convincing case that Leadscope misappropriated ACS’s intellectual property. {¶ 55} Further damaging to its case, ACS’s own information technology employees, such as Robert Swann, could not equivocally state that Leadscope had misappropriated PathFinder: Q. And you were asked your opinion regarding whether Drs. Blower and Myatt and Mr. Johnson developed Leadscope on their own or whether it was Chemical Abstracts’ technology? A. On several occasions. 22 January Term, 2012 Q. And in, in fact—well, what was your response to such questions? A. Honestly don’t know. I could not tell you if they did or did not. {¶ 56} President Massie also testified that ACS did not bring a lawsuit before Leadscope filed a patent application because it could not tell what, if any, information had been misappropriated: Q. And if I understand correctly, your testimony earlier, it was, you were not—that [Robert Swann] advised you we couldn’t tell without seeing code or independent development, essentially; is that fair to say? A. I don’t know what you mean by “independent development.” But I would agree with you that I said to him not only my concerns, but there were a lot of concerns within CAS, a lot of management was talking about this product and worrying about whether anything was taken from us. So I did ask Mr. Swann, what do you think, what do you people in technology think. He said, we can’t tell from the outside whether this has our information in it.