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Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach
Citation: 102 F.3d 1524Docket: Nos. 95-15759, 95-16403, 95-16595 and 95-16754
Court: Court of Appeals for the Ninth Circuit; December 19, 1996; Federal Appellate Court
The litigation stemming from the failures of Lincoln Savings and Loan and American Continental Corporation involves a suit by Lexeeon Inc. against attorneys representing a consolidated class of investors who suffered losses from the collapse. Lexeeon, a law and economic consulting firm, had prepared reports for Lincoln Savings and became implicated in the investors' claims. After resolving these claims, Lexeeon and its principal, Professor Daniel R. Fischel, filed a federal lawsuit against several attorneys from Milberg Weiss and Cotchett, alleging malicious prosecution and defamation, asserting that the attorneys wrongfully implicated Lexeeon due to personal vendettas. The case was transferred to the District of Arizona and assigned to Judge John M. Roll, where outcomes were generally unfavorable for Lexeeon, leading to four consolidated appeals. Lexeeon appeals adverse judgments related to its malicious prosecution and abuse of process claims, the denial of a motion to amend, and a motion to remand to Illinois. Milberg Weiss appeals the denial of injunctive relief against Lexeeon’s claims and the dismissal of its counterclaims. Following the Lincoln Savings collapse, investors filed various actions alleging securities law violations, which were consolidated into MDL 834 and assigned to Judge Richard Bilby. Efforts to add Lexecon and Fischel as defendants were initially denied, but later, Lexecon was included in a sixth amended complaint. The plaintiffs alleged that Lexecon had provided misleading reports to regulators to prevent adverse regulatory actions. Lexecon's motion for summary judgment was denied, with the court finding material issues regarding the truthfulness of Lexecon's reports and potential reckless intent regarding Lincoln’s fraudulent activities. The appellate court affirmed the district court's judgments. In March 1992, a trial began, and shortly before the evidence concluded, Lexecon sought a directed verdict, which Judge Bilby denied, citing unresolved jury questions regarding Lexecon's knowledge of Lincoln Savings' actions. On June 22, 1992, discussions in Judge Bilby’s chambers led to a resolution aimed at mitigating Lexecon’s exposure to a jury verdict, wherein the term “resolution” replaced “settlement” to protect Lexecon’s professional reputation. The resolution stipulated that the court would dismiss Lexecon without prejudice, and a stipulation for dismissal with prejudice would be held for potential future claims. Lexecon agreed to provide class services as a subcontractor to Touche Ross, who had settled for $7.5 million, but ultimately discharged its obligations by transferring approximately $700,000 in fees to the class in October 1992. However, Lexecon subsequently filed a lawsuit in Illinois on November 25, 1992, alleging malicious prosecution, abuse of process, tortious interference, defamation, and commercial disparagement. The case was later transferred to the District of Arizona and assigned to Judge Roll after Judge Bilby recused himself, partly due to concerns about Lexecon's portrayal of its resolution role. A telephonic hearing on December 7, 1992, led Judge Bilby to criticize Lexecon's characterization of the resolution, declaring that it was a mutually beneficial exchange rather than a dismissal in Lexecon’s favor. Lexecon’s appeal of this order was unsuccessful due to the absence of a final judgment in MDL 834, and it did not appeal the final judgment issued in March 1994. Meanwhile, Judge Roll dismissed Lexecon’s claims of malicious prosecution and abuse of process in November 1993, and other defendants responded, with counterclaims filed by Milberg Weiss for breach of contract, fraud, unjust enrichment, and promissory estoppel. Discovery was completed, followed by motions for summary judgment from the defendants. In March 1994, final judgment was entered in MDL 834 before Judge Roll addressed these motions. Lexecon subsequently filed a motion under 28 U.S.C. § 1407 to remand its case to the Northern District of Illinois, which Judge Roll advised Lexecon to renew after discovery concluded. In November 1994, Lexecon renewed this motion; however, Milberg Weiss sought to make the transfer to Arizona permanent under 28 U.S.C. §§ 1404(a) and 1406, and requested injunctions against Lexecon's claims. Judge Roll denied the injunction motion, prompting Milberg Weiss to appeal (No. 95-15759). Before ruling on the remand and transfer motions, Judge Roll granted summary judgment against Lexecon for its claims of tortious interference, commercial disparagement, and defamation concerning Milberg Weiss’ sixth amended complaint. However, Lexecon's defamation claim arising from a letter by Milberg Weiss partner Kevin P. Roddy survived. Judge Roll dismissed Milberg Weiss’ counterclaims and entered a final judgment in favor of the Cotchett defendants, who were not Lexecon’s primary target and had no involvement in the Roddy letter, under Fed. R. Civ. P. 54(b). Lexecon appealed this judgment (No. 95-16403). Judge Roll later denied Lexecon’s motion for remand and granted Milberg Weiss’ motion to make the transfer to Arizona permanent. Lexecon appealed this decision via a petition for writ of mandamus, which was denied but allowed for direct appeal. A significant event occurred between July 25-28, 1995, when Lexecon's defamation claim was tried, resulting in a jury verdict for Milberg Weiss. Lexecon subsequently appealed the final judgment, focusing on the transfer order and the dismissal of its malicious prosecution and abuse of process claims (No. 95-16595). Milberg Weiss cross-appealed regarding the dismissal of its counterclaims (No. 95-16754). The appellate court outlined the order of issues to address, starting with the permanent transfer of Lexecon’s case to Arizona, followed by the denial of Milberg Weiss’ injunction motions, and the dismissals of Lexecon's and Milberg Weiss’ respective claims. The JPML had transferred Lexecon’s case to Arizona under its authority per 28 U.S.C. § 1407(a), and such transfers must be remanded unless previously terminated. The court's decision to transfer Lexecon’s lone remaining claim for trial to itself, while rejecting a referral to the JPML for remand to Illinois, faces significant challenge from Lexecon. Prior to the trial on the defamation claim, Lexecon sought a writ of mandamus to vacate this transfer and to compel the district court to refer the matter to the JPML for remand. The court previously denied this petition, acknowledging that Lexecon's arguments regarding 28 U.S.C. §§ 1407 and 1404(a) might have merit but were contrary to existing case law and Multidistrict Litigation Rule 14(b). The dissent argued that 28 U.S.C. 1407(a) only allows for pretrial transfers, thus preventing a trial transfer by the transferee court to itself. The review of the district court's transfer under 28 U.S.C. 1404(a) is conducted for abuse of discretion, while the interpretation of its duties under 28 U.S.C. 1407 is reviewed de novo. The ability of a section 1407 transferee court to transfer a case to itself for trial has been acknowledged in various court decisions. The JPML Clerk noted that while the Panel generally limits its power to pretrial transfers, it is not unusual for a transferee judge to transfer cases to themselves for trial under 28 U.S.C. 1404(a) or 1406 after pretrial proceedings. This practice is justified by efficiency considerations, including the avoidance of conflicting rulings. Despite these efficiency arguments, Lexecon contends that 28 U.S.C. 1407(a) mandates remand for trial, stating that transferred actions should be remanded by the panel after pretrial proceedings unless terminated. The conflict between the statute and the rule is recognized but deemed not to undermine the traditional powers of the district court, which were not intended to be redefined by Congress when enacting section 1407 in 1968. The House Report accompanying the proposed statute clarifies that the bill pertains exclusively to pretrial stages in multidistrict litigation, not affecting trial locations or excluding transfers under other federal statutes. It mandates that cases transferred must return to the originating district after coordinated pretrial proceedings, explicitly excluding trials from consolidated proceedings. The report emphasizes that the Coordinating Committee's experience was limited to pretrial matters, leading to a legislative focus on defining the powers of the Judicial Panel on Multidistrict Litigation (JPML). Despite initial uncertainties, the transferee court's authority to transfer a case for trial is supported by consistent practice. The legislation aims to enhance judicial efficiency, as noted in the report. Additionally, JPML Rule 14(c) outlines the process for initiating remand, requiring the JPML to consider remand at the conclusion of pretrial proceedings upon motion by any party, suggestion by the transferee court, or the JPML's initiative. If no such actions occur, the transferee court retains jurisdiction to complete litigation, including trials, to prevent indefinite delays. In this case, the transferee court did not suggest remand, and the JPML did not order it, allowing the court to proceed with a trial on the defamation claim. Lexecon's attempts for remand were initiated in the district court rather than the JPML, which failed to activate the remand process, resulting in the district court's proper conduct of the trial. The propriety of the Section 1404(a) transfer was contested by Lexecon, which claimed that the district court lacked authority to transfer the case due to Section 1407 and that the transfer was improper under Section 1404(a). Lexecon argued that the transfer from Chicago to Arizona resulted in inefficiencies and prejudice, as it was forced to appear before Judge Roll, who was not familiar with MDL 834 and allegedly dismantled its case. However, the court disagreed, noting Lexecon's prior involvement in the District of Arizona, which negated claims of unfamiliarity. Judge Roll had sufficiently familiarized himself with the case by the time of the transfer, and his dismissal of most of Lexecon's claims was not grounds for asserting prejudice. The court affirmed the district court's authority and fairness in trying Lexecon's defamation claim in Arizona. Regarding Milberg Weiss's request for injunctive relief following the final judgment in MDL 834, it sought to prevent Lexecon from pursuing claims against the Milberg Defendants in other jurisdictions, arguing that the final judgment constituted res judicata. The district court denied this motion, finding Lexecon's claims were not precluded. The appellate court reviews denials of injunctive relief for legal errors or abuse of discretion and affirmed the lower court's decision. The mootness of the appeal was also addressed, as Milberg Weiss's request to enjoin litigation was rendered moot after the final judgment was entered. However, the appeal regarding enjoining Lexecon from pursuing claims in other courts remained viable. Milberg Weiss’s argument of res judicata was deemed exaggerated, as the doctrine only precludes relitigation of issues that were or could have been raised in the prior action, and Judge Bilby's dismissal of Lexecon's claims was without prejudice. A dismissal without prejudice does not have a res judicata effect, as established in In re Corey, 892 F.2d 829 (9th Cir.1989). Judge Bilby's order from December 31, 1992, clarified the resolution but did not constitute a judgment on the merits regarding Lexecon's claims. Therefore, Lexecon's reliance on Western Sys. Inc. v. Ulloa and Golden v. Pacific Maritime Ass’n is unfounded, as those cases pertain to the relitigation exception to the Anti-Injunction Act, which is irrelevant here since Lexecon's claims are not barred by res judicata. For injunctive relief, a party must demonstrate either a likelihood of success on the merits with potential irreparable harm or present serious questions concerning the merits with a favorable balance of hardships. Milberg Weiss failed to meet these criteria by February 6, 1995, as it had also sought a permanent transfer of the case and was awaiting Judge Roll's ruling on Lexecon's referral motion. Even if rulings had been unfavorable, appeal options were available, negating claims of irreparable harm. Regarding Lexecon’s appeal of the dismissal of its malicious prosecution and abuse of process claims under Fed. R. Civ. P. 12(b)(6), the review is de novo, taking all allegations as true. The denial of leave to amend is reviewed for abuse of discretion. Under Arizona law, to succeed in a malicious prosecution claim, the plaintiff must prove that the defendant initiated a civil action motivated by malice, without probable cause, that was ultimately decided in the plaintiff's favor, resulting in damages. Probable cause requires an honest and objectively reasonable belief in the merits of the lawsuit. Lexecon has adequately alleged the initial and final elements of its malicious prosecution claim; however, the claim ultimately fails. Judge Bilby's rulings in MDL 834, particularly the order from December 31, 1992, establish that the litigation was not terminated in Lexecon's favor. Lexecon contends that the district court improperly reviewed the MDL 834 record while ruling on Milberg Weiss’s 12(b)(6) motion, but legal precedent allows consideration of public records, including court records from related cases, in such motions. The court emphasizes that ignoring Judge Bilby's published opinion would be excessively formalistic. Lexecon's assertion that the MDL 834 record supports its claim of favorable termination is incorrect; a termination resulting from a settlement does not satisfy the favorable termination element required for a malicious prosecution claim. Lexecon's reliance on case law that suggests a settlement may constitute a favorable termination is misplaced, as the specific circumstances of this case—where Lexecon paid $700,000 for its dismissal—clearly indicate the litigation did not terminate in its favor. Consequently, Lexecon's malicious prosecution claim against Milberg Weiss and Cotchett is deemed unviable. Milberg Weiss's argument regarding the tort of malicious prosecution suggests that First Amendment principles from the Noerr-Pennington doctrine and the case of Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. have redefined the requirements for such claims. They assert that these cases impose a heightened threshold, requiring plaintiffs to demonstrate that the defendant's prior suit was "objectively baseless" and that no reasonable litigant could expect success. This change would modify how “probable cause” and “malice” are interpreted under Arizona law by removing the need for a subjective, honest belief. However, it is noted that Noerr-Pennington and PREI were specific to federal antitrust issues and did not directly address state tort law, leading to inconsistent applications in the circuit. For instance, in some cases, like the timber company’s counterclaim, the heightened standard was applied, while in others, it was deemed irrelevant. The rationale behind these varied applications remains unclear, but it may reflect a judicial preference for litigation that promotes certain public interests. Although Milberg Weiss argues that their class action aligns with this rationale, the court declines to base its rejection of Lexecon's malicious prosecution claim on this premise. Instead, the court concludes that the MDL 834 litigation against Lexecon was not favorably terminated, leading to a failure to state a malicious prosecution claim under Arizona law. In addressing abuse of process, it is defined by the Restatement (Second) of Torts as the misuse of legal process for an unintended purpose, which Arizona courts accept. The plaintiff must prove that the defendants acted willfully in using judicial processes for an improper ulterior motive. The essence of this tort focuses on the misuse of process rather than the wrongful initiation of legal actions. The court’s task is to assess whether Lexecon's addition as a defendant in the MDL 834 litigation had a primary purpose that deviated from the intended objectives of that litigation. No objective to coerce false testimony existed in MDL 834, which primarily aimed to recover assets for investors following the collapse of American Continental/Lincoln Savings. Lexecon's inclusion as a defendant was contested, with claims that class counsel sought to extract false testimony against other defendants, impede Arthur Young & Co.'s expert testimony, and diminish Lexecon's appeal to potential clients. Lexecon's assertion that Milberg Weiss attempted to procure false testimony through a fifth amended complaint was unsubstantiated, as the complaint was ultimately denied, and no coercion occurred thereafter. Additionally, acts by Milberg Weiss deemed abusive—such as the failed fifth amended complaint motion and the use of MDL 834 litigation for cross-examination in separate cases—did not constitute actionable abuse of process since they were not aimed at harming Lexecon. Consequently, Lexecon's abuse of process claim was dismissed appropriately. Regarding Milberg Weiss’ counterclaims of fraud, breach of contract, unjust enrichment, and promissory estoppel linked to Lexecon’s liability negotiations, the district court dismissed them. Milberg Weiss argued that Lexecon's negotiations aimed to avoid damaging cross-examination for future cases rather than to mitigate liability exposure. However, as Milberg Weiss was not a party in the MDL 834 litigation, but rather counsel for the class, the court ruled that any harm from the resolution impacted the class, not the counsel. Milberg Weiss also contended that Lexecon misrepresented its insurance status during negotiations, but this claim was also dismissed. Milberg Weiss's claim was properly disregarded by the district court as it was not included in the pleadings nor was a request to amend made, in accordance with Federal Rule of Civil Procedure 15(a). The judgments in cases Nos. 95-15759, 95-16403, 95-16595, and 95-16754 were affirmed. Lexecon Inc. had been dismissed from the case on August 12, 1992, without prejudice, allowing the court to clarify the dismissal's terms and conditions. The court's corrections under Federal Rule of Civil Procedure 60(a) aimed to address errors in the record, not to alter historical facts. Lexecon's allegations in a related case asserted that the defendants dismissed it due to a lack of merit and that it voluntarily returned professional fees to benefit the class. However, the court deemed these assertions factually incorrect, stating that the dismissal was part of a negotiated exchange, where Lexecon provided administrative services and later opted to pay $900,000 in cash. In return, the plaintiffs' counsel agreed to dismiss Lexecon without prejudice and avoid cross-examination regarding a "settlement" to protect Lexecon’s business interests. The term "resolution" was used deliberately to prevent implications tied to "settlement." Additionally, Lexecon's counsel submitted a transcript from a related case, FDIC v. Ernst, for reference. Mr. Spencer's cross-examination of the Lexecon expert in the Tennessee case was conducted in full compliance with the agreement made in MDL 834, as he did not mention or inquire about the MDL settlement before the jury. The court found that as long as the Class Plaintiffs' counsel adheres to Mr. Spencer's approach, the Lexecon resolution remains intact. The agreement between the Class Plaintiffs and Lexecon was not a definitive ruling in favor of either side but was a mutually beneficial compromise of a disputed issue. The importance of judicial economy in multidistrict litigation is emphasized, highlighting that Congress enacted 28 U.S.C. 1407 to prioritize this principle over the usual deference to a plaintiff's choice of forum. The dissenting opinion criticized the transfer of the case to the District of Arizona, arguing it contravened 28 U.S.C. 1404(a) and 1407(a), but overlooked JPML Rule 14(b), which permits the transferee judge to transfer cases within the district, as well as 28 U.S.C. 1407(f), which grants the JPML broad rule-making authority consistent with existing laws. The dissent claims that Rule 14(b) contradicts sections 1404(a) and 1407(a), but it is argued that the JPML, composed of designated judges, should be presumed to act consistently with congressional acts unless compelling evidence suggests otherwise. The alleged inconsistencies raised by the dissent are not significant enough to overcome this presumption, affirming the validity of Rule 14(b) and the justification of Judge Roll's actions. Lexecon is criticized for not seeking remand from the JPML, despite knowing the likely outcome, and it did not pursue its options under Rule 14(c) before the case's permanent transfer to the District of Arizona. Lexecon's assertion that the denial was not an appealable interlocutory order is dismissed as irrelevant since final judgment has been entered, making such orders appealable. Procedural irregularities raised by Lexecon regarding Milberg Weiss' appeal are deemed meritless. Lexecon's request for attorneys' fees due to a frivolous appeal is denied without prejudice, as it did not follow the proper procedure for filing. The record supports that the case against Lexecon meets the probable cause standard, although the malicious prosecution claim was dismissed because Lexecon failed to demonstrate that the class claims were objectively baseless. The court notes the ongoing legal debate on the applicability of the Noerr-Pennington doctrine to state law tort claims. The excerpt references multiple legal cases illustrating the application of First Amendment analyses to tort claims, particularly those involving interference with contractual relations and business relationships. In *State of South Dakota v. Kansas City Southern Indus.*, the court applied First Amendment principles to a tort claim regarding contractual interference. Similarly, *Brownsville Golden Age Nursing Home, Inc. v. Wells* involved defamation and Noerr-Pennington analyses related to defendants reporting legal violations. The case *Havoco of Am. Ltd. v. Hollobow* invoked Noerr-Pennington protections for the right to petition against tortious interference claims. In *Sierra Club v. Butz*, First Amendment principles were similarly applied to a counterclaim for interference with advantageous relationships, although *Florida Fern Growers, Inc. v. Concerned Citizens of Putnam County* declined to follow the Sierra Club precedent, indicating the need for the circuit to eventually clarify the issue. The discussion also notes that while Arizona courts have a broad definition of "process," it does not encompass a failed lawsuit without issued process. Lexecon's proposed amendment was deemed insufficient as it merely restated prior claims without addressing existing legal deficiencies, leading to the district court's appropriate denial of the motion for leave to amend, as supported by *Jackson v. Bank of Hawaii*.