When Does a Demand Letter Constitute Extortion?

The court’s decision in Falcon Brands, Inc. v. Mousavi & Lee, LLP, 2022 WL 246851 (Jan. 27, 2022) provides insight for all lawyers regarding when settlement demands “cross the line and become professional misconduct.” 

As David Carr explained in March of 2018 in Demand Letters: Where Do You Draw the Line?, this question implicates the law governing criminal extortion under Penal Code sections 518 and 519, as well as the Rules of Professional Conduct (then former Rule 5-100, today Rule 3.10), which prohibit threatening criminal, administrative or disciplinary charges in order to gain an advantage in a civil dispute. Criminal extortion is defined as obtaining property from another induced by wrongful use of force or fear. My earlier article in July 2019, Settlement Demands, Extortion and the Litigation Privilege, explained that settlement demands may be protected by the litigation privilege only when related to pending litigation or litigation contemplated in good faith.

Under current Rule 3.10, a lawyer may declare an intent to seek criminal, administrative or disciplinary charges, but may not make such statements in order to obtain an advantage in a civil dispute. Specifically, a lawyer cannot state or imply that a criminal or administrative action will be pursued unless the opposing party agrees to settle the civil dispute. Rule 3.10, Comment [1].

The Falcon decision involved an escalating series of communications by the plaintiff’s lawyer to defense counsel concerning the plaintiff’s claims. The first communication announced the representation of the plaintiff by counsel and the plaintiff’s employment records. In her second communication, sent two days later, the plaintiff’s counsel complained about not receiving the requested records and conveyed a $490,000 settlement demand, which expired the next day.

If Falcon failed to timely respond, the plaintiff’s counsel indicated she would notify Falcon’s potential merger partner about the dispute, and would make the merger partner a defendant in litigation if the matter could not be resolved. In her second communication, the plaintiff’s counsel also referenced alleged violations of Bureau of Cannabis Control’s(BCC) regulations, and listed purported illegal activities, although the alleged violations were not linked to the settlement demand. 

After a response from Falcon’s counsel, the plaintiff’s counsel replied that she would be notifying the defendant’s merger partner before filing the complaint. Falcon’s counsel submitted a declaration to indicate that, in a telephone conversation, the plaintiff’s counsel stated that if Falcon did not settle the claims, she would inform the merger partner that Falcon had engaged in illegal activities. Two days later, the plaintiff’s counsel advised Falcon’s counsel that she had notified the merger partner without disclosing the “other issues mentioned” in her earlier demand letter, but planned to send the demand letter listing the alleged illegal activities shortly. Falcon’s counsel accused the plaintiff’s counsel of trying to extort an undue settlement. 

The parties failed to settle, and the plaintiff’s counsel sent the settlement demands to the merger partner and filed the complaint, which alleged illegal activities without linking those to plaintiff’s employment claims. Falcon filed a cross-complaint against plaintiff’s counsel, alleging extortion and intentional interference with contract. The plaintiff’s counsel filed a motion to strike under the anti-SLAPP statute. 

The plaintiff’s counsel argued that her communications were protected by the anti-SLAPP law. The trial court granted the motion to strike, finding the statements protected by the litigation privilege, but the appellate court reversed, holding that some of the statements in the demand letter constituted extortion, relying heavily on Flatley v. Mauro (2006) 39 Cal.4th 299.

On appeal, the court ruled the first communication announcing the representation and seeking the file was “innocent.” The second, which listed alleged criminal violations without linking those to the demand, standing alone, “may not have crossed the line,” but the line was crossed by the later communication that implied the case should be settled or the alleged criminal conduct would be disclosed the following week. 

The communication of criminal conduct unrelated to her client’s damage claim exceeded the scope of the representation of the client. The court distinguished between whether plaintiff’s counsel believed she had a legitimate reason to disclose the alleged criminal misconduct to the merger partner, indicating that was a separate issue from whether she had a legitimate reason to threaten Falcon that she would do so if Falcon rejected her settlement demand. The court held that “the extortion arises out of the threat rather than the follow through.”

The appellate court affirmed the trial court’s decision as to the cause of action for intentional interference with contract. The appellate court found that the disclosure of information to Falcon’s merger partner was made in furtherance of contemplated litigation and protected by the litigation privilege, and by the anti-SLAPP statute.

The Falcon decision did not address Rule 3.10, but it is important to keep the case law, penal code and disciplinary prohibitions in mind when carefully crafting demand letters.