Update: On Sept. 18, 2012, the Supreme Court of Ohio handed down a merit decision in this case.  Read the analysis here.

On Sept. 7, 2011 the Supreme Court of Ohio will hear an intellectual property dispute in the case of American Chemical Society v. Leadscope.  The issue in this complex case is what the standard should be to sustain an unfair competition claim based on malicious litigation.  Is bad intent enough or should the entire suit be baseless for a claim to be warranted?  The appeal also deals with defamation issues based on extrajudicial statements about this lawsuit, one by company officials in an internal memo, the other by counsel in a local business newspaper.

The plaintiff, the American Chemical Society (“ACS”,) is a group of chemical scientists with offices in all fifty states.  ACS runs various scientific research programs and studies different chemical compounds.   Defendant Leadscope is a company that provides specialized research software. Leadsope was founded by three former scientist employees of ACS. The three are individual defendants in the lawsuit.  They resigned from a division of ACS after a disagreement over how to handle a pending research project.

After the individual defendants left ACS to form their own company, they began work on new research, and applied for a patent for technology ACS claims was the same as what they’d worked on at ACS.  ACS sued Leadscope for intellectual property violations.  Leadscope counterclaimed for defamation, tortious interference, and unfair competition.  After an eight-week trial, a jury found for Leadscope and the individual defendants, and awarded them $26.5 million in compensatory and punitive damages. The trial court then awarded a total of nearly $8 million in attorney fees.

The Tenth District Court of Appeals upheld the judgment, finding that Ohio recognizes malicious litigation as a basis for an unfair competition claim.  A company cannot file a lawsuit against a competitor for the sake of distracting that competitor or making that competitor exert needless time and expense in defending a lawsuit. The issue presented in ACS is how to prove that the litigation was in fact malicious.

ACS is arguing that the standard to determine malicious litigation should be an “objectively baseless” standard.  That standard holds that the First Amendment protects lawsuits unless the suit was “objectively baseless.”  ACS argued that this should be the test for sustaining an unfair competition suit, and because its suit against Leadscope was not baseless, the trial court should have issued a judgment notwithstanding the verdict and reversed.

Leadscope countered, however, that the standard should be the “bad faith” test – that if a plaintiff brings a suit against a defendant in bad faith, as a distraction, or as a way to hurt a competitor’s business – that should be sufficient for a malicious litigation claim.

The appeals court found that existing precedent supported Leadscope’s position, and concluded that the jury, as the finder of fact, could reasonably conclude that ACS undertook the litigation in bad faith, and was rooted “in its alleged desire to suppress, by any means necessary, Leadscope as a new software competitor.”

Arguing that this reading is far too broad and that malicious litigation was intended, if at all, as a narrow proposition, a number of powerful institutions have filed amicus briefs on behalf of ACS.  Among them are the Ohio Attorney General’s Office, the Chamber of Commerce and the Ohio State Bar Association.

The Chamber of Commerce brief argues that the First Amendment would be violated if liability were imposed “on a party for filing a lawsuit, or for accurately describing that lawsuit, unless the lawsuit is determined to be objectively baseless.”

The OSBA brief focuses on the defamation claim, arguing that the statements made by the lawyers for ACS were “utterly innocuous” and “did not go beyond the existing public record in a legitimate civil dispute,”, arguing that the Court should find that statements, that “merely repeated the already public allegations made in a genuine lawsuit, are absolutely privileged from defamation liability.”

The AG’s brief argues that the Ohio Supreme Court has never recognized the separate tort of malicious litigation, and should not do so now.  The AG’s brief also emphasizes the fact that there are numerous remedies, including attorney fees, dismissals, and Rule 11 sanctions, to prevent frivolous litigation without recognizing the tort of malicious litigation.

The Attorney General’s office, as amicus, has been granted permission to share the oral argument with ACS on Sept.7.

ST