August 2013 - Lawful and Unlawful Prelitigation Demand Letters
by Matthew A. Hodel and Fred L. Wilks
The prelitigation demand letter seeking “payment or else” is fully consistent with the lawyer’s duty to zealously and ethically advocate for the client. Its use is prevalent: it is a “well established legal practice to communicate promptly with a potential adversary, setting out the claims made upon him, urging settlement, and warning of the alternative of judicial action.” Lerette v. Dean Witter Org., Inc., 60 Cal. App. 3d 573, 577 (1976). Its appropriate use is consistent with good public policy. If settlement can be reached “without resort to the courts—even without the filing of a lawsuit—it is incumbent upon the attorney to pursue such a course of action first.” Id.
Nevertheless, demand letters implicate ethical rules and potentially expose a lawyer to both civil and, in extreme cases, criminal liability. Given these realities, how far is too far when it comes to making threats in prelitigation demand letters?
Ethical Rules and Penal Code Provisions Implicated by Demand Letters
“A member shall not threaten to present criminal, administrative, or disciplinary charges to obtain an advantage in a civil dispute.” Cal. Rules of Prof. Conduct, Rule 5-100(A) (1989) (“Rule 5-100”). If a lawyer believes in good faith that an adversary’s conduct constitutes a criminal, administrative, or disciplinary violation, the lawyer may report the adversary to the appropriate authority. However, the lawyer may not first use the threat of making the report to support the client’s demands. Libarian v. State Bar, 38 Cal. 2d 328, 329-30 (1952).
Extortion is defined as “the obtaining of property from another, with his consent . . . induced by a wrongful use of force or fear . . . .” Penal Code § 518 (West 1939). Fear, for purposes of extortion, may be induced by a threat to “accuse the individual threatened . . . of any crime; or . . . to impute to him or them any deformity, disgrace or crime; or . . . expose any secret affecting him or them.” Penal Code § 519 (West 1939). Lawyers in their practice of law are not exempt from the law of extortion. Libarian, 38 Cal. 2d at 329-30.
Lawyers May Legitimately Threaten Civil Litigation
It is not improper to send a settlement demand letter threatening to file a civil action if the client’s demands are not met. See Lerette, 60 Cal. App. 3d at 577 (1976) (lawyer properly threatened to sue for violation of federal and state securities laws and for fraud if the dispute was not settled); see also Cal. State Bar Form. Op. No. 1991-124 (1991) (recognizing the legitimacy of attempting to promptly settle civil disputes by threatening to “aggressively prosecute the civil matter to its conclusion”). According to the Committee on Professional Responsibility and Conduct’s advisory opinion, the threat to pursue “all available legal remedies” if settlement is not reached—even where the nature of the dispute implicates possible criminal or administrative action—does not constitute an overt threat to present a criminal or administrative charge in violation of Rule 5-100. See Cal. State Bar Form. Op. No. 1991-124. To interpret the meaning of such a statement as a violation of Rule 5-100 “would have a chilling effect on the legitimate effort to promptly settle the civil dispute.” Id.
As a general matter, the litigation privilege set forth in Civil Code section 47(b) immunizes litigation-related conduct from liability. The principal purpose of this statute is to afford litigants and witnesses the utmost freedom of access to the courts without fear of being harassed subsequently by derivative tort actions. Silberg v. Anderson, 50 Cal. 3d 205, 213 (1990). The litigation privilege also encourages lawyers to “zealously protect their clients’ interests.” Id. at 214. To accomplish these purposes, the privilege bars all tort causes of action except a claim of malicious prosecution. Id. at 215-16.
California courts have frequently applied the litigation privilege to prelitigation demand letters. See, e.g., Blanchard v. DIRECTV, Inc., 123 Cal. App. 4th 903, 919-22 (2004); Aronson v. Kinsella, 58 Cal. App. 4th 254, 262-68 (1997); Financial Corp. of Am. v. Wilburn, 189 Cal. App. 3d 764, 777 (1987); Larmour v. Campanale, 96 Cal. App. 3d 566, 568 (1979); Lerette, 60 Cal. App. 3d at 577. For the privilege to apply, the challenged statement must be “connected with, or have some logical relation to, the action,” and not be “extraneous to the action.” Silberg, 50 Cal. 3d at 220. Applying that standard in the context of a prelitigation communication means the statement must be made “with a good faith belief in a legally viable claim and in serious contemplation of litigation.” Aronson, 58 Cal. App. 4th at 262-68. On the other hand, the privilege may not apply if there is only a “bare possibility” of litigation and the demand is nothing more than a negotiation tactic: “a lawsuit or some other form of proceeding must actually be suggested or proposed, orally or in writing.” Edwards v. Centex Real Estate Corp., 53 Cal. App. 4th 15, 34 (1997). Once the communication satisfies the above-stated test, the privilege is absolute. Blanchard, 123 Cal. App. 4th at 919. The privilege applies regardless of whether the communication was made with malice or intent to harm, and whether the alleged conduct was fraudulent, perjurious, unethical, or even illegal. Id. at 920.
Claims of civil extortion based on prelitigation demand letters were held barred by the litigation privilege in Blanchard. There, the defendant satellite television provider, DIRECTV, sent demand letters to thousands of recipients explaining that their use of illegal signal-theft equipment to gain access to programming violated federal law and could subject them to criminal prosecution. Plaintiffs responded by filing a class action alleging extortion. The court held that DIRECTV’s demand letters were absolutely protected by the litigation privilege. Id. at 922.
Anti-SLAPP Challenges to Claims of Civil Extortion
In Flatley v. Mauro, 39 Cal. 4th 299 (2006), a well-known dance performer sued an Illinois lawyer for “civil extortion” and related causes of action in response to a highly aggressive—so much so that the supreme court saw fit to attach the letter to its opinion—prelitigation demand letter and follow-up phone calls. In the letter, the lawyer accused the recipient of sexually assaulting his client, and threatened to “go public” with the accusations to numerous news organizations and on the Internet. The lawyer also threatened to turn over information to the authorities. By phone, the lawyer demanded that the victim pay his client “seven figures” in exchange for his client’s silence. Based on these uncontroverted facts, the California Supreme Court affirmed the denial of the defendant lawyer’s special motion to strike the complaint brought pursuant to Code of Civil Procedure section 425.16, known as the anti-SLAPP (Strategic Lawsuits Against Public Participation) statute. See Cal. Civ. Proc. Code § 425.16 (West 2011). Denying the lawyer’s anti-SLAPP motion, the court found the lawyer’s demand letter and subsequent phone calls constituted “criminal extortion as a matter of law.” Flatley at 330.
In its discussion of extortion law, the court explained that the external action threatened, such as reporting the recipient to the authorities, need not itself be an illegal action. It is the coupling of the threat of action outside the confines of the lawsuit with the demand for money that constitutes the illegality. Id. at 326. The court also explained that it is immaterial whether the purpose of the threat was to collect money that is justly due to the extortionist. Id. at 326-27. Also immaterial is whether the recipient of the threat in fact committed the crime or indiscretion. Id. at 327.
Procedurally, the Flatley case is limited in scope—an affirmation that in these “narrow circumstances where either the defendant concedes the illegality of its conduct or the illegality is conclusively shown by the evidence” (id. at 316), a plaintiff’s case could not be thrown out of court at the outset by application of the anti-SLAPP statute. This procedural statute is intended to protect the right of litigants to the “utmost freedom of access to the courts without fear of being harassed subsequently by derivative tort actions.” Contemporary Servs. Corp. v. Staff Pro Inc., 152 Cal. App. 4th 1043, 1055 (2007). The statute thus provides for a two-step process for evaluating whether the case should be dismissed at the outset of the litigation. First, defendant must make a prima facie showing that plaintiff’s claim arises from or was based on an act of the defendant in furtherance of the right of petition or the right of free speech. Cal. Civ. Proc. Code § 425.16(b)(1); Varian Med. Sys., Inc. v. Delfino, 35 Cal. 4th 180, 192 (2005). This first requirement generally includes the basic act of filing litigation and includes “communications preparatory to or in anticipation of the bringing of an action or other official proceeding.” Briggs v. Eden Council for Hope & Opportunity, 19 Cal. 4th 1106, 1115 (1999). If a defendant meets this burden, the burden then shifts to the plaintiff to establish a probability of prevailing on the merits of the asserted claim. Varian, 35 Cal. 4th at 192. If the plaintiff cannot make this showing, the defendant’s anti-SLAPP motion will be granted. Id.
Based on these principles, the defendant/lawyer in Flatley argued that his prelitigation demand letter satisfied the first step of the anti-SLAPP analysis—i.e., the plaintiff’s claims arose from or were based on acts of the defendants in furtherance of the right of petition or the right of free speech—thus shifting the burden to the plaintiff to establish a probability of prevailing on the merits. The court rejected the defendant/lawyer’s argument, holding that because the demand letter for the purposes of the anti-SLAPP analysis constituted extortion “as a matter of law,” it did not qualify as a constitutionally protected form of free speech. Flatley, 39 Cal. 4th at 305. The demand letter thus failed to satisfy the first step of the anti-SLAPP analysis, and the court declined to reach a decision about whether the plaintiff had demonstrated a probability of prevailing on the merits. In so holding, however, Flatley acknowledged that the litigation privilege is a relevant substantive defense a plaintiff must overcome to prevail on the merits. Flatley, 39 Cal. 4th at 323. Moreover, while Flatley expressly called into question the use of the anti-SLAPP procedure in Blanchard, the Flatley decision did not disturb Blanchard’s application of the litigation privilege to bar liability for civil extortion based on prelitigation demand letters.
The Flatley decision was followed in Cohen v. Brown, 173 Cal. App. 4th 302 (2009), although the Cohen court appeared to deny the anti-SLAPP motion based on evidence of something less than extortion “as a matter of law.” 173 Cal. App. 4th at 315, 318. In Cohen, a lawyer threatened to report his former co-counsel to the State Bar if his co-counsel refused to release a settlement check and, when his co-counsel refused, the lawyer assisted the client with filing a State Bar complaint. The recipient of the threat sued for civil extortion, and the defendant responded with an anti-SLAPP motion. The trial court denied the motion without explicitly finding extortion “as a matter of law”—it found merely that the State Bar complaint was filed in an “extortive context.” Id. at 315. The court of appeal upheld that ruling without discussing whether the finding was sufficient under Flatley. Id. at 318.
More recently, in Mendoza v. Hamzeh, 215 Cal. App. 4th 799 (2013), a lawyer’s anti-SLAPP motion challenging a “civil extortion” lawsuit was denied. The lawsuit alleged that the lawyer’s demand letter threatened to report the recipient’s alleged fraud to various public authorities, as well as to the recipient’s “customers and vendors” whom he suggested might also be victims of similar fraud. Although acknowledging that the lawyer’s demand letter may not have been as egregious as the letter in Flatley, the Mendoza court nevertheless held that the demand letter, for the purposes of anti-SLAPP analysis, “constitutes criminal extortion as a matter of law.” Id. at 837. In so holding, the court emphasized that the letter threatened to report the recipient’s “‘substantial fraud’ to the California Attorney General, the Los Angeles District Attorney, the Internal Revenue Service, the Better Business Bureau and Mendoza’s customers and vendors if Mendoza did not pay ‘damages exceeding $75,000.’” Id. Once again, the motion was denied without reaching the merits of the plaintiff’s claim.
Thus, the anti-SLAPP procedure often may be unavailable to challenge claims of extortion where the demand letter makes threats that go beyond simply filing a lawsuit, and where the demand, including conduct surrounding it such as telephone threats, clearly violates Rule 5-100. It also bears emphasizing that none of the cases reach the question of whether, ultimately, on the merits, the demand letter was protected by the litigation privilege. Where the threatened action, in contrast to Flatley and Mendoza, is not extraneous to seeking relief in the courts, then an anti-SLAPP motion would be appropriate.
Testing the Outer Limits of Proper Demand Letters?
Currently pending before the court of appeal is Malin v. Singer, et al., No. B237804, Cal. App. 2 Dist. (filed Dec. 6, 2011). The case involves a demand letter written by attorney Martin Singer (labeled the “Guard Dog to the Stars” by some, see Michael Cieply, Guard Dog to the Stars (Legally Speaking), N.Y. Times, May 21, 2011 at http://www.nytimes.com/2011/05/22/business/22singer.html), accusing the recipient of, among other things, misappropriating company assets. The letter also allegedly accused the recipient of using company resources to facilitate sexual liaisons with male partners, and included a photograph of one such alleged sexual partner (a retired superior court judge). The demand letter attached a copy of a draft complaint, apparently leaving blank spaces in the portions dealing with the sexual partners, and promised that when filed “there will be no blanks in the pleading.” The recipient sued the lawyer for extortion based on the demand letter, but also alleged computer hacking and wiretapping. The lawyer filed an anti-SLAPP motion. The trial court denied the motion pursuant to Flatley, apparently finding that the threat to reveal the names of sexual partners in a publicly filed complaint was tangential to the demands and constituted extortion as a matter of law for the purposes of the anti-SLAPP analysis. How much the other allegations of hacking and wiretapping played in the analysis is not perfectly clear. See Daily Journal, Pre-litigation demand letter in 2nd District Spotlight, May 17, 2013, at page 3. Reduced to the simplest issue, Singer may present the question of whether a demand letter that allegedly does no more than threaten a public lawsuit can make allegations of such questionable relevance and be so patently offensive as to remove it from anti-SLAPP protection as a matter of law.
Prelitigation demand letters are fully consistent with the lawyer’s duty to perform legal services with competence and to represent the client “zealously within the bounds of the law.” Cal. Rules of Prof. Conduct, Rule 3-110; People v. McKenzie, 34 Cal. 3d 616, 631 (1983). That duty includes aggressively advocating for the client in ways which will encourage early settlement without burdening the courts. Larette, 60 Cal. App. 3d at 577. But a lawyer may not threaten to present criminal, administrative, or disciplinary charges to obtain an advantage in a civil dispute. Rule 5-100. Threats to make reports to others, such as customers and vendors, are also questionable after the Mendoza opinion.
To preserve the right to defend a lawsuit using the anti-SLAPP procedure, the best course is to draft demand letters that stick to the facts and the proposed claims, avoiding discussion of salacious or extraneous matters unrelated to the allegations in the lawsuit. The letter should also clearly state the client is contemplating commencement of civil litigation. Demand letters sent purely for posturing purposes, without any serious contemplation of imminent litigation, and/or which make threats of extracurricular “reporting” and “publishing” outside the lawsuit, pose the risk that a court may later find even the litigation privilege inapplicable.
Matthew A. Hodel and Fred L. Wilks are business litigation attorneys with Hodel Briggs Winter LLP in Irvine, California. Matt is also a member of the OCBA’s Professionalism and Ethics Committee, and can be reached at MHodel@hbwllp.com. Fred can be reached at FWilks@hbwllp.com.