Demand Letters as Extortion

Just how far can a lawyer's demand letter go?

Given the penchant many counsel have for bombast, it is not surprising that the all-too-familiar demand letter has spawned a subcategory of litigation all its own. The question raised is often the same: When does an attorney's demand letter become illegal extortion? A series of California appellate decisions provides important insight into this very question.

Applying Pressure
Let's begin with a hypothetical: A potential client named Jenny comes to see you after losing her job. She worked as the executive secretary to Randy, a company's high-profile CEO. Jenny proceeds to recount Randy's sexual advances, including an allegation that he forced her to have intercourse while the two were out of town at a trade show. When they returned home, Jenny confronted Randy, but he brushed off her accusations: He said that she consented and that, in any case, it was all her word against his. She promptly quit.

Jenny asks you to represent her in a claim for constructive wrongful termination, assault and battery, intentional infliction of emotional distress, and various other causes of action. She says that if you put enough pressure on Randy, he will pay big money to settle the case early and keep things quiet.

You immediately sign her up as a client, interview her, and set about drafting a complaint and a preliminary demand letter. You decide to ask for $5 million in damages, and your letter (which includes a copy of the draft complaint) makes no bones about your intentions: If Randy doesn't pay up, you will notify the media, file a police report, and press the district attorney to prosecute Randy for rape.

Jenny may have a good case, but your demand letter could create a problem. In fact, the letter may well cross the line that divides forceful advocacy on behalf of an injured client from the tort of extortion.

It's happened. More than once.

Lord of the Dance
The California Supreme Court confronted this very dilemma when internationally acclaimed Irish dancer Michael Flatley sued attorney Dean Mauro for civil extortion after receiving a demand letter that claimed Flatley had raped Mauro's client. The attorney had demanded a seven-figure payout, threatened punitive damages in the nine-figure range, and further threatened to publicly expose to the press a litany of Flatley's personal, nonpublic information. In addition, Mauro threatened that "all information" on Flatley's violation of law would be "immediately turned over" to authorities, foreign and domestic. In a postscript, the demand letter referred to press releases that would be disseminated to media sources including Fox News, the New York Times, and the BBC and to "INTERNET POSTINGS WORLDWIDE." (See Flatley v. Mauro, 39 Cal. 4th 299, 337-39 (2006).)

Attorney Mauro did not take Flatley's lawsuit lying down. He filed a special motion to strike the complaint under the anti-SLAPP statute (Cal. Code Civ. Proc. § 425.16), contending that his demand letter was protected by the First Amendment as well as the so-called litigation privilege. (See Cal. Civ. Code § 47.)

Flatley responded that the letter was not privileged at all because it amounted to illegal extortion, which is defined as "the obtaining of property from another, with his consent ... induced by wrongful use of force or fear." (Cal. Penal Code § 518.) For purposes of extortion, fear may be induced by a threat to accuse the threatened individual of a crime or to "expose or impute to him ... any deformity, disgrace or crime." Moreover, any person who makes such threats is guilty of extortion regardless of whether money is actually paid to the threatening party. (Cal. Penal Code § 523.)

In the Flatley case, the court held that the attorney's conduct constituted extortion and, as such, it was "illegal as a matter of law." For that reason, the conduct was not protected by the First Amendment or the anti-SLAPP statute. (Flatley, 39 Cal. 4th at 333.)

This ruling has come to be known as the Flatley exception to the anti-SLAPP statute. In short, if the defendant's conduct is illegal as a matter of law, the special motion to strike is off the table.

But there is more to glean from Flatley than the line in the sand about illegal conduct. For example, the court explained that the threat itself, in isolation, may be perfectly legal. Thus, there is nothing illicit about threatening to go to the police to report a crime. But when that threat is combined with a request for money, it transmutes into extortion. As the court elaborated, "The law does not contemplate the use of criminal process as a means of collecting a debt." (Flatley, 39 Cal. 4th at 805.) In fact, whether the threatened party actually committed the crime is irrelevant.

What's more, an attorney may be committing extortion even though no crime is specified in the demand letter. As the Flatley court explained: "The accusations need only be such as to put the intended victim of the extortion in fear of being accused of some crime. The more vague and general the terms of the accusation the better it would subserve the purpose of the accuser in magnifying the fears of his victim. ..." (Flatley, 39 Cal. 4th at 327.) In light of such expansive language, attorneys would be wise to avoid threatening to report any kind of misconduct whatsoever. For example, assume the demand letter sent on behalf of the hypothetical Jenny included a threat to "tell everyone" about Randy's "boorish behavior." Such a vaguely worded threat may not seem like extortion because no crimes are identified, but a court could still deem it a veiled threat to report a crime such as assault or battery.

Defining Extortion
Threats to report a crime are not the only illicit intimidation to which Flatley applies. The extortion statute encompasses many other types of improper coercion, including threats to (1) injure the person or their property, or that of a third person; (2) accuse a relative of the threatened person of a crime; (3) impute to the threatened person a "deformity" or "disgrace"; (4) "expose a secret affecting" him or her; and (5) report the target's immigration status. (Cal. Penal Code § 519.) Yes, even exposing a secret that "affects" the opposing party can constitute extortion. Accordingly, the range of threats to which Flatley applies is broad, the common thread being the use of fear - of embarrassment or prosecution - to extract money.

The Meaning of Illegal
Subsequent opinions have placed an important limitation on the scope of the Flatley exception: It applies only to conduct by an attorney that violates a criminal law. Because the Flatley court held that "illegal" activity does not qualify for anti-SLAPP protection, parties began filing lawsuits against attorneys alleging that various violations of civil statutes and ethical rules were illegal and therefore, not protected. Appellate courts faced with such arguments have unanimously reinterpreted the word illegal to mean criminal, and have prohibited application of the Flatley exception to conduct that violates only noncriminal laws. (For example, see Fremont Reorganizing Corp. v. Faigin, 198 Cal. App. 4th 1153 (2011).) This is so even if the attorney's conduct violated a civil statute authorizing treble damages. (Cabral v. Martins, 177 Cal. App. 4th 471, 477 (2009).)

Flatley's Progeny
Last year produced two more published opinions that dealt with demand letters, followed by a third in June. They serve as guideposts, helping define the boundary between a proper settlement demand and extortion.

In the first of these cases, the owner of a copy business discovered that one of his managers had fraudulently failed to pay bills, employee salaries, and sales taxes. The owner's attorney sent a letter to the manager demanding cooperation with the owner's investigation into the fraud and repayment of all damages. The attorney followed this demand with a threat to file a legal action against the manager, "as well as reporting him to the California Attorney General, the Los Angeles District Attorney, the Internal Revenue Service regarding tax fraud, the Better Business Bureau, as well as to customers and vendors" whom he may have defrauded. (Mendoza v. Hamzeh, 215 Cal. App. 4th 799, 802 (2013).)

The manager's response? He sued the attorney for civil extortion.

The court held that the threats to report the manager to the various authorities listed, as well as the threat to tell the manager's customers and vendors about his alleged fraud, did indeed constitute extortion. Not only did the attorney lose his anti-SLAPP motion in the trial court, he also lost his appeal - and had to pay the manager's attorneys fees.

The Mendoza case is important because it significantly expands the scope of the Flatley exception. Whereas the state Supreme Court in Flatley limited its holding to "the specific and extreme circumstances of this case" (Flatley, 39 Cal. 4th at 332), the Mendoza court went the opposite direction, holding that threats in a demand letter need not be "particularly extreme or egregious" to constitute criminal extortion. (Mendoza, 215 Cal. App. 4th at 807.)

A Blankety-Blank Complaint
In the second instance, a general partner in a restaurant company learned that some of the parent company's owners had been misusing the restaurant and its assets to arrange sexual liaisons for various individuals, including a judge. The partner's attorney, following common practice, sent a letter to the owners detailing the allegations and enclosing a draft complaint. As the attorney explained in the letter, he left blank spaces in the draft complaint that, if he had to file it, would be filled in with the names of the specific individuals for whom such liaisons were arranged. He even enclosed a photograph of the judge for good measure.

When the owners sued the attorney for extortion, the trial court agreed with them, finding that the letter's fill-in-the-blanks warning constituted a threat to accuse the owners of a crime, impute disgrace to them, or expose a secret affecting them. (Malin v. Singer, 217 Cal. App. 4th 1283, 1292 (2013).)

The trial court in Malin felt that the threat to reveal names of sexual partners, along with the enclosed photo, went "well beyond a typical demand letter" and that "[t]he allegations of sexual misconduct contained in the demand letter in this case are very tangential to the causes of action in Defendants' complaint, which have to do with a business dispute and alleged misuse of company resources." (Malin, 217 Cal. App. 4th at 1292.)

The appellate court reversed. It distinguished the demand letter from those in Flatley and Mendoza in two important ways. First, the attorney in Malin did not overtly threaten to disclose the owners' alleged wrongdoings to a prosecuting agency or the public at large. This is an important distinction: Threatening to expose a "secret" usually constitutes extortion in the context of a demand letter, but not if the secret will only be exposed to the court where the complaint is filed.

Second, the Malin court found that the draft complaint and the demand letter had at least some relation to the underlying dispute. (Malin, 217 Cal. App. 4th at 1299, 1302.)

Further limiting the scope of the Flatley exception, the Malin court noted that when a person receives a threat to harm a third party, there are crucial distinctions that impact the legal analysis. For example, if the threat is to inflict physical harm to a third party, any third person can qualify to make the threat extortion; but if the threat is embarrassment at revealing a secret, the affected third party must be a relative of the recipient of the threat.

But perhaps the most critical distinction drawn by the Malin court was that the demand letter did not threaten overtly to turn someone in to prosecuting authorities or the IRS. (See Malin, 217 Cal. App. 4th at 1299.)

Veiled Threats
A more recent case evokes that venerable dialog from those classic B-movie strong-arm thugs: "This is a real nice false claim operation you got here. Would be an awful shame if someone reported it to the authorities."

The legal question is, when do veiled threats run afoul of the Flatley exception?

A man sued his former employer and its president for defamation and wrongful termination, based in part on the defendants' alleged retaliation against the employee for his protesting their false reports to the government. (Stenehjem v. Sareen, 2014 WL 2646729 (Cal. Ct. App.).)

The president filed a cross-complaint for civil extortion based on a prelitigation email sent by the employee, which contained no express demand for money and no express threat to report a crime. Instead, the employee wrote that he had no intent to report any crimes, proclaiming that "I do not wish to make a Federal case out of this" and "I never wanted this to become a long and expensive process, let alone involve the United States Attorney General, the Department of Justice, or the DOD." The employee's email message made no express settlement demand, referencing only his continuing desire "to resolve this matter face to face." (Stenehjem, 2014 WL 2646729, at *8.) The trial court dismissed the cross-complaint on the employee's anti-SLAPP motion, finding that the email in question constituted protected prelitigation speech.

However, the court of appeal reversed, explaining that although the demand letter by itself may not have constituted extortion, when viewed in context of the previous settlement negotiations its extortionate intent was clear.

While the email in question did not include a demand for money, it followed a series of settlement communications in which a demand for money had been made; therefore, the reference to resolving the matter "face to face" clearly implied the employee was still seeking to negotiate a financial settlement. Likewise, the court saw through the employee's false sympathy when he proclaimed not to want to make this a "Federal case" or to involve the authorities: It noted that the employee's email reference to a potential qui tam suit - in which a private individual sues on behalf of a public entity - made clear the implication of reporting the alleged crimes. (Stenehjem, 2014 WL 2646729, at *9.)

Attorneys should take away from this that courts will see through too-cute attempts to obfuscate extortionate threats. Context is just as important as the express language used when determining whether a particular demand constitutes extortion.

... Or Else!
The California Supreme Court did something extraordinary in its Flatley ruling: It attached the attorney's demand letter as an appendix (Flatley, 39 Cal. 4th at 337-40), offering lawyers a veritable road map of what not to do. Though being quoted is often a flattering experience, having your words appended verbatim to a judicial opinion that calls you out as an extortionist is something else entirely. Don't let that happen to you

Zachariah D. Baker is an associate in the San Francisco office of K&L Gates, where he practices product liability and commercial litigation.

---

Pointers for Practice

1 Counsel should never include in any demand letter a threat to expose to the public or report to a prosecuting agency the opposing party's alleged wrongdoing. This is a broad, bright-line rule, and it even encompasses veiled threats that are not explicitly stated; all that's needed to constitute extortion is a judicial finding that the threat put the opposing party in fear of being publicly accused or reported to a prosecuting agency. (The fact that the opposing party actually engaged in the wrongdoing makes no difference whatsoever.)

2 Threats need not be extreme or egregious to constitute extortion. Merely threatening to expose a secret affecting the opposing party, or to impute any "disgrace" to them, will satisfy the statutory definition of extortion.

3 Counsel should think carefully before including any allegations in a demand letter that might be perceived as sensational, especially if they are tangential to the underlying legal claims. Provocative allegations will not run afoul of the Flatley rule so long as they are deemed inextricably tied to the underlying legal action and there is no threat, express or implied, of disclosing them to any third parties other than the court where the complaint would be filed. -Z.D.B.

---