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Ninth Circuit:
Developer’s Petitions Against Rival Are Shielded From Suit
Opinion Says Exception to First Amendment Protection for Sham Litigation Inapplicable Where Action Is Not Baseless, Despite Allegations That Defendant Admitted Activities Were Shakedown
By Kimber Cooley, associate editor
The Ninth U.S. Circuit Court of Appeals held yesterday that summary judgment in favor of developer defendants accused of filing environmental objections and legal actions against proposed projects by a competitor—allegedly as a pattern of extorting settlement funds from rivals—is proper as the First Amendment protects such petitioning activities.
According to the panel, an exception for sham lawsuits does not save the plaintiffs’ claims as they are unable to establish that the objections to the projects were baseless even in the face of allegations that defendant Stephen Nourmand remarked:
“You know the drill. It will take a check to make this go away.”
On June 10, 2019, Plaintiffs Relevant Group LLC, and subsidiary companies established for three of the development projects, filed suit against The Sunset Landmark Investment LLC, Sunset’s manager Stephen Nourmand, the real estate brokerage firm Nourmand & Associates, and Michael Nourmand, the president of the brokerage.
Alleged Violations
The complaint asserts claims for violations of the Racketeer Influenced and Corrupt Organizations Act, codified at 18 U.S.C. § 1961 et seq., based on allegations that the defendants abused the processes available for filing objections under the California Environmental Quality Act (“CEQA”) to extort funds from the plaintiffs. The complaint alleges:
“Nourmand Enterprise accomplishes its goals by targeting competing developers and initiating (or threatening to initiate) sham environmental lawsuits for the sole purpose of delaying the development of competing properties. Instilling fear of severe economic loss and harm in competing developers, Nourmand Enterprise extracts ransom money from its victims in exchange for their agreement to not pursue what it admits to be sham litigation.”
District Court Judge Otis D. Wright II of the Central District of California denied a motion for summary judgment filed by the defendants, finding that “Plaintiffs have sufficiently alleged that Defendants’ environmental lawsuits constitute ‘sham’ litigation.” In September 2022, the case was transferred to District Court Judge Philip S. Gutierrez.
Gutierrez sua sponte ordered supplemental briefing on whether the sham lawsuit exception to the First Amendment protections applied. After a hearing, Gutierrez granted summary judgment in favor of the defendants, finding that the earlier decision denying the motion was clearly legally erroneous.
Circuit Judge Milan D. Smith wrote the opinion affirming the judgment and finding no abuse in discretion by Gutierrez in reconsidering the motion. Smith said that the reconsideration was proper due to the clearly erroneous nature of the earlier decision and the fact that manifest injustice would have occurred if the prior decision was allowed to stand.
Petitioning Activities
The Noerr-Penington doctrine—named after the U.S. Supreme Court cases of Eastern Railroad Conference v. Noerr Motor Freight and United Mine Workers of America v. Pennington, both decided in the 1960s—provides that those who petition the government for redress are protected by the First Amendment from liability; sham petitions, however, are not shielded from legal action.
Smith noted that jurisprudence in the area has established two relevant circumstances in which the sham litigation exception might apply.
In 1993, the U.S. Supreme Court held in Professional Real Estate Investors Inc. v. Colombia Pictures Inc. (referred to in the opinion as “PREI”) that the exception to constitutional protection applies where the lawsuit is objectively baseless and the defendant’s motive in bringing it is unlawful.
The Ninth Circuit announced another circumstance in the 1994 case of USS-Posco Industries v. Contra Costa County Building Construction Trades Council (referred to in the opinion as “POSCO”) for a series of lawsuits brought under a policy of starting legal proceedings without regard to the merits for unlawful purposes.
Relevant argues that Gutierrez erred by applying the test to determine whether the litigation activity is a “sham” under the framework announced by the high court—which requires a plaintiff to first show that the suit is objectively baseless without regard to the defendant’s motives.
Blurred Lines
Smith said:
“Unfortunately, cases in our circuit since PREI and POSCO have occasionally blurred the lines concerning which test should apply and when. For example, while cases originally referred to PREI as the test to apply when a ‘single’ suit is at issue, subsequent cases have described PREI as the test to use when there is ‘a single sham lawsuit (or a small number of such suits).’ ”
Gutierrez considered that the defendants here challenged only four of Relevant’s projects in CEQA proceedings and concluded that the “PREI exception should apply.” The plaintiffs assert that the court should have counted as “proceedings” each of the various objections and appeals in the four CEQA actions.
Rejecting this suggestion, Smith opined:
“In establishing its ‘series’ framework, POSCO relied on a fact pattern that involved twenty-nine lawsuits….Perhaps due to the rarity of that number, its infrequent application in our case law is a feature rather than a bug. Because this case only involves four actions resembling ‘lawsuits’ in the traditional sense, we apply the PREI exception, rather than the POSCO exception to the facts of this case.”
Sham Lawsuit Exception
Turning to the sham-lawsuit framework, the jurist said:
“An action is objectively baseless when ‘no reasonable litigant could realistically expect success on the merits.’….As the PREI court explained, objective reasonableness is measured by the existence of ‘probable cause’ as understood in traditional common law actions….The threshold for what constitutes probable cause is low: it requires no more than a ‘reasonable belief’ that there is ‘some chance’ ‘that [a] claim may be held valid upon adjudication.’ ”
Smith noted that Gutierrez found that two of the four CEQA actions were not objectively baseless because “[t]he fact that Relevant settled both lawsuits is strong, if not conclusive, evidence” of merit. The plaintiffs assert that reliance on the fact that they settled the suits is not evidence of the meritorious nature of the actions, as parties will often settle claims to avoid the cost of litigation.
Unpersuaded, the judge noted that “we have previously said that settlement indicates a lawsuit is not objectively baseless” and remarked:
“But even if Relevant were correct that settlements are not indicative of a lack of objective baselessness, that does not mean that they are indicative of objective baselessness, either. A survey of other cases in our circuit suggests that to the extent settlements are relevant to the sham exception, they are only relevant as to the second prong of the PREI exception, i.e., whether the lawsuit was brought with an improper motive.”
He noted that courts consider the improper motive only if the case is found to be without merit and noted that some of the defendants’ objections to the projects were cited and successfully pursued by other parties. Smith reasoned:
“Defendants’ actions cannot be said to be objectively baseless as they ‘succeeded’ in having the agency consider the environmental impacts of Relevant’s projects….As California courts have noted,…CEQA creates a ‘low threshold’ for success.”
Not Objectively Baseless
As to the other two projects, he noted that the litigation surrounding them was not objectively without merit, noting that some CEQA violations were found.
He added that “if Relevant is concerned about the CEQA process being abused (as many persons and entities have claimed has occurred since its enactment), its recourse is to bring this to the attention of the state legislature and the governor, not to try to squash the process altogether in federal court.”
Smith acknowledged that the analysis did not touch on the allegations of improper motive but said:
“To be sure, Relevant raises several facts suggesting that Defendants had an improper purpose in bringing their actions….But we cannot review that evidence unless we first find that Defendants’ actions were objectively baseless.”
The case is Relevant Group LLC v. Nourmand, 23-55574.
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