Stealth Litigation Upheld

A scrap metal firm with the only shredder in a metropolitan area does not violate antitrust laws by secretly funding a lawsuit intended to prevent a competitor from installing its own shredder, according to a federal appeals court ruling. [Baltimore Scrap Corp. v. David J. Joseph Co., et al., 257 F.3d 394 (4th Cir. 2001)]

When Baltimore Scrap Corp. (BSC) sought a zoning permit to install a metal shredder, several citizens groups fought the proposal. After city officials issued the permit, David J. Joseph Co. (DJJ) and its associates, which owned the only other shredder in the Baltimore area, decided to fight the zoning approval by covertly assisting the citizens groups' appeal of the zoning decision.

The groups accepted the anonymous support with no questions asked. Shortly thereafter, David Irwin, a lawyer hand-picked by the DJJ group, filed an appeal for the protesters. After some legal wrangling, the Baltimore City circuit court upheld the zoning board's decision. Thereupon, Irwin filed a motion asking the court to stay its ruling pending review by a higher court.

DJJ's involvement remained concealed from the citizens groups and BSC until a misdirected fax exposed the setup. Unperturbed, the citizens groups directed Irwin to continue the fight.

BSC opposed the stay, arguing that the zoning appeal was a fraud because DJJ and its associates were the actual interested parties. Meanwhile, Irwin claimed he represented only the citizens groups. After the circuit court refused to stay its ruling, BSC installed its shredder and began operations. A state appeals court eventually dismissed the citizens groups' challenge on technical grounds.

BSC sued DJJ and its associates in federal district court, alleging violations of federal and state antitrust, and fair competition laws. As a general rule, a company is a monopoly if it has the power to control prices or exclude competition. A monopoly is illegal only if the company acquired the power by keeping out other companies, rather than by having better products or services, or a better business strategy.

The district court called the defendants' conduct “deceitful” and “underhanded.” Nonetheless, the court dismissed the complaint citing a legal doctrine announced by the U.S. Supreme Court some 40 years ago that recognizes the rights of companies under the First Amendment to seek action from any branch of government, even if such action has anti-competitive effects.

The doctrine, however, does not protect sham or fraudulent litigation. Sham litigation has no reasonable prospects for success and simply are attempts to interfere with a competitor's business. The rarely applied fraud exception covers conduct that “deprive[s] the litigation of its legitimacy.”

On appeal, BSC argued that both exceptions stripped the defendants of any immunity. The U.S. Court of Appeals for the Fourth Circuit, however, affirmed the dismissal, finding that the citizens groups' claims “were not objectively baseless” and that a non-party's secret funding did not undermine the legitimacy of the zoning appeal.

Last June, the U.S. Supreme Court declined to review the decision.