On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action No. 94-cv-07506)
Before: MANSMANN, HUTCHINSON *fn* and ROTH, Circuit Judges
Maia Caplan and Vigilant Insurance Company (Vigilant) have brought this expedited appeal from the District Court's Order of May 25, 1995. The order declared null and void an agreement between Vigilant and Caplan, settling a civil action, entitled Caplan v. Fellheimer Eichen Braverman & Kaskey et al., which Caplan had brought in the Eastern District of Pennsylvania. The May 25 Order also enjoined Caplan from entering into any settlement of the action unless defendants, Fellheimer Eichen Braverman & Kaskey (FEB&K) and David Braverman, were parties to the settlement.
The appellees, FEB&K and Braverman, have moved to dismiss the appeal on the grounds both that the May 25 Order is not an injunction appealable pursuant to 28 U.S.C. Section(s) 1292(a)(1) and that the order is interlocutory and does not fall within the "collateral order" exception to the final judgment rule.
Because we find that the May 25 Order is a preliminary injunction, we conclude that we do have appellate jurisdiction of the appeal. We also conclude that Vigilant is a proper party to the appeal. Finally, because we find that the district court erred in its assessment of the factors required to grant injunctive relief, we will reverse the Order of May 25 and remand this action to the district court for further proceedings consistent with this opinion.
In January 1995, Caplan filed a five count amended complaint against FEB&K, the law firm where she had formerly been employed, and against its managing partner Braverman, alleging: (1) violations of Title VII of the 1964 Civil Rights Act, by creating a hostile environment for women at the firm and by sexually harassing Caplan's secretary; (2) negligent infliction of emotional distress; (3) tortious interference with existing and prospective contracts; (4) intentional infliction of emotional distress; and (5) defamation. Defendants tendered the amended complaint to Vigilant, their liability insurance carrier. In February, Vigilant notified the defendants that it would provide a defense for them on all counts of the amended complaint but with a full reservation of rights. Vigilant reserved its rights because it had determined that the first four counts of the amended complaint were not covered under the insurance contract. *fn1
Defendants filed counterclaims against Caplan, asserting malicious abuse of process and civil conspiracy to maliciously abuse process. The district court dismissed these counterclaims as premature because the underlying action had not been terminated in defendants' favor.
Vigilant's policy with FEB&K allows Vigilant to settle suits without FEB&K's consent. The relevant provision of the insurance policy reads as follows:
1. We will defend claims or suits against the insured seeking damages to which this insurance applies. We may make:
a. Such investigation of any occurrence, claim or suit, and
b. Such settlement within the applicable Amount of Insurance available; as we think appropriate. Appendix (App.) at 248.
In April 1995, Caplan and the defendants entered into settlement negotiations. Although the parties came close to an agreement on monetary damages, they could not agree on other issues, including defendants' demand that Caplan issue a public retraction as part of any settlement. When they could not agree on the wording of the public retraction, negotiations broke down. On May 17, attorneys for both parties informed the district judge that they could not reach a settlement.
At the same time as defendants were negotiating with Caplan, they were also negotiating with Vigilant to take over full defense and liability for the case in return for a payment to them by Vigilant of $190,000, the settlement amount that Caplan and defendants appeared to have agreed upon if Caplan could be persuaded to issue a retraction. These negotiations also broke down on May 17.
After the breakdown of negotiations, Vigilant's attorney wrote to the district judge on May 17, requesting a settlement conference. All counsel agreed that such a conference would be helpful. At the request of the district judge, the magistrate judge scheduled a conference for May 22. On the morning of the conference, the defendants notified counsel for Caplan that they would not be attending because one of their attorneys was out of the country on vacation. Caplan's counsel telephoned the magistrate judge's chambers to report defendants' absence. Defendants did not notify Vigilant, and counsel for Vigilant appeared at the magistrate judge's chambers to negotiate. In addition, Caplan herself did not receive notice that defendants and their counsel would be absent. She came up from Washington, D.C., for the conference.
Although the conference was rescheduled, the magistrate judge encouraged those present to discuss the possibility of settlement. That same day, Vigilant and Caplan came to an agreement under which Caplan would execute a general release of all claims in favor of defendants in return for Vigilant's payment to Caplan of $200,000. Caplan signed the release and her attorneys executed a stipulation of dismissal with prejudice of the suit. Both the release and the stipulation were to be held by Vigilant pending delivery of the settlement funds.
The following day, May 23, defendants filed an emergency motion with the district court, seeking an order "temporarily restraining and, after hearing, preliminary [sic] enjoining Plaintiff and her counsel from taking any action whatsoever to consummate the purported 'settlement' arranged by Plaintiff and Defendants' insurance carrier without the knowledge and authorization of Defendants." App. at 128. In support of the motion, defendants asserted that if the injunction were not granted, defendants would "suffer irreparable harm" and that the "harm to Defendants outweighs the harm the injunctive relief sought may cause Plaintiff". The potential harm to defendants, cited by them in their memorandum accompanying the motion, included the loss of the right to vindication at trial and a wrongful and irreparable deprivation of "the agreed to public retraction from Plaintiff". Defendants claimed that their "legitimate interests will be severely prejudiced if the Court does not turn to its inherent equitable powers to grant Defendants' motion in order to prevent this injustice." It is apparent from defendants' memorandum that their prime interest in voiding the settlement between Caplan and Vigilant was to be able to bring an action against Caplan for wrongful use of civil proceedings or for malicious prosecution. Under Pennsylvania's malicious prosecution statute, 42 Pa. Cons. Stat. Ann. Section(s) 8351, an essential element of such an action is that the underlying litigation have terminated favorably to the defendant. See Junod v. Bader, 458 A.2d 251 (Pa. Super. 1983) (holding that a compromise is not an outcome sufficiently favorable to a defendant to entitle him subsequently to bring a malicious prosecution action against his accuser).
The district court held a hearing on the emergency motion at 4:15 p.m. on May 23. Present at the hearing were the attorneys for Caplan, for Braverman, for FEB&K, and for Vigilant. Defendant Braverman was the only witness. He testified that Caplan's suit had caused him and FEB&K embarrassment and loss of business in the amount of "tens of thousands of dollars a month" and that settlement of the suit without a public retraction from Caplan would prevent defendants from clearing their names.
Although Vigilant was not a party to the proceeding and had not made a motion to intervene, its counsel, Robert B. White, was present and wished to make a statement. Counsel for FEB&K opposed any appearance by Vigilant on the basis that Vigilant had no standing to appear before the court.
The court, however, permitted White to speak. White explained that the policy language gave Vigilant the unqualified right to settle actions in which it provided a defense. He also represented that in return for the agreed settlement payment of $200,000, Vigilant had obtained a general release from Caplan covering all five counts, along with a stipulation of dismissal signed by Caplan's counsel. White stated that the case was over and no injunction was necessary.
In its Order of May 25, the district court granted defendants' motion for injunctive relief. In its Memorandum Opinion, the court recited the four factors a court must consider before granting injunctive relief: 1) reasonable probability of success on the merits, 2) irreparable injury, 3) harm to the other party, and 4) public interest.
In discussing likelihood of success on the merits, the court defined the issue as "whether Defendants can have the litigation settled for them by their insurance carrier." App. at 19. The insurance policy at issue was not before the court but the court assumed for the sake of argument that the settlement clause, as we have quoted it supra, was in the policy. The court concluded that under Pennsylvania law an insurance company would settle a case in bad faith if it settled "without regard to the fact that it may be barring a counterclaim of the insured." App. at 20, quoting Bleday v. OUM Group, 645 A.2d 1358, 1363 (Pa. Super. 1994), allocatur denied 655 A.2d 981 (1955). The court stated that it had to determine "whether Defendants have a reasonable likelihood of showing that their rights will be prejudiced by a settlement and that Vigilant was aware of this when it negotiated a settlement with Plaintiff." App. at 21. Because Vigilant was aware that defendants wanted to sue Caplan for malicious prosecution ...