Liberty Synergistics Inc v. Microflo LTD et al
Filing
140
MEMORANDUM and ORDER ADOPTING IN PART REPORT AND RECOMMENDATIONS. For the reasons set forth in the attached memorandum and order, the Court adopts in part and declines to adopt in part Judge Walls report and recommendation. The Court denies Defend ants motion to strike the Complaint as to the named Defendants. The Court grants Defendants motion to strike the Complaint as to Does 1 through 20. The Court also denies Defendants motion for sanctions. Ordered by Judge Margo K. Brodie on 9/25/2014. (Ramos, Christopher)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
--------------------------------------------------------------LIBERTY SYNERGISTICS, INC., a California
Corporation,
Plaintiff,
MEMORANDUM & ORDER
11-CV-523 (MKB)
v.
MICROFLO LTD., EDWARD MALKIN,
ECOTECH LIMITED, a Cayman Islands Company,
and DOES 1 through 20, inclusive,
Defendants.
--------------------------------------------------------------MARGO K. BRODIE, United States District Judge:
Plaintiff Liberty Synergistics, Inc. (“Liberty”) commenced the above-captioned action in
California state court against Defendants Microflo Ltd. (“Microflo”), Edward Malkin, Echotech
Limited and certain unknown individuals, Does 1 through 20, alleging malicious prosecution of a
prior litigation brought by Microflo against Liberty. (Docket Entry No. 1.) The action was
removed to the Central District of California and later transferred to the Eastern District of New
York by stipulation. (Docket Entry No. 15.) On August 16, 2011, Defendants filed an Amended
Motion to Strike the Complaint (“motion to strike”) pursuant to California Code of Civil
Procedure § 425.16, otherwise known as California’s “anti-SLAPP” statute. (Docket Entry No.
34.) Defendants seek (1) to dismiss this action as a strategic lawsuit against public participation,
or “SLAPP,” and (2) an award of sanctions against Plaintiff. (Id.) By Amended Report and
Recommendations (“R&R”) dated December 17, 2013, Magistrate Judge William D. Wall
recommended that Defendants’ motion to strike the Complaint be granted, and that the action be
dismissed pursuant to California’s anti-SLAPP statute. (R&R, Docket Entry No. 134.) Judge
Wall further recommended that should the Court adopt the R&R, the parties “be given an
opportunity to brief the application for sanctions.” (Id. at 1.) Plaintiff timely filed objections to
the R&R, (Pl. Obj. to R&R (“Pl. Obj.”), Docket Entry No. 136), and Defendants filed a response
to Plaintiff’s objections, (Def. Mem. in Opp. (“Def. Resp.”), Docket Entry No. 137). For the
reasons set forth below, the Court adopts in part, and rejects in part, Judge Wall’s R&R. The
Court adopts Judge Wall’s R&R as to the determination that the issue of which substantive law
applies to Plaintiff’s malicious prosecution claim is the law of the case, but declines to adopt the
portion of Judge Wall’s R&R which found that Plaintiff does not have a reasonable probability
of prevailing on its malicious prosecution claim. The Court also denies Defendants’ motion for
sanctions.
I. Background
a. The Underlying Litigation
On June 24, 2008, Microflo commenced an action in the Supreme Court of the State of
New York, County of Nassau (“New York Supreme Court”), against Dan Foy, Julie Swink,
Ronald N. Green, Ravi Krish, Rick Cole, Gary Green, Michael Tumis (a/k/a Mike Tumis),
Walgreen Company (“Walgreen”) and Plaintiff, alleging fraud, unfair trade practices, unjust
enrichment, breach of contract and breach of duty of good faith and fair dealing, tortious
interference with prospective economic advantage, and violations of the Racketeer Influenced
and Corrupt Organizations Act of 1970, 18 U.S.C. § 1961 et seq. (“RICO”) (the “Underlying
Litigation”). Complaint, Microflo v. Liberty Bearing Corp., No. 08-011622 (N.Y. Sup. Ct. June
24, 2008).
2
According to the Underlying Litigation, Microflo sells “re-usable filters or nondisposable filters used in the processing of photographs” in one-hour photo labs. 1 Id. ¶ 54.
Liberty’s business “involve[d] the distribution and supply of chemistry, disposable filters and
supplies to one hour photo labs.” Id. ¶ 59. In March 2004, Microflo contacted Walgreen in an
effort to have Walgreen sell Microflo’s filters. Id. ¶ 62. In April 2004, Michael Tumis, an
employee of Walgreen, asked Microflo to provide samples of the filters to Walgreen for testing,
which Microflo agreed to provide. Id. ¶ 64–65. After approximately sixty to ninety days of
testing, Tumis advised Edward Malkin, Microflo’s sole shareholder, that the “[f]ilters were
acceptable, the price was okay and Walgreen would go ahead but that the [f]ilters would need to
go through Liberty.” Id. ¶ 68.
At an August 23, 2004 meeting, Tumis and Malkin agreed to a price of $16.00 per filter,
however, Tumis further instructed Malkin that the filters were to be sold by Microflo to Liberty,
and then sold by Liberty to Walgreen. Id. ¶ 74. On or about August 27, 2004, Malkin met with
representatives of Liberty regarding “what Liberty would need to do in connection with the roll
out or distribution of the [f]ilters” to Walgreen. Id. ¶ 81. At the August 27, 2004 meeting,
believing that Walgreen was proceeding with the purchase of Microflo’s filters, Malkin
answered inquiries from Liberty regarding the construction and composition of the filters,
“thereby divulging to Liberty confidential trade secret information.” Id. ¶¶ 83–84. Liberty
representatives also asked to be paid one-third of the gross receipts from the sales of the filters to
Walgreen. Id. ¶ 87. Microflo objected to the price and by letter dated September 20, 2004,
1
The Court relies on the facts as stated in the complaint filed in the Underlying
Litigation. Complaint, Microflo v. Liberty Bearing Corp., No. 08-011622 (Sup. Ct. June 24,
2008).
3
advised Walgreen that it was not interested in proceeding with the sale of the filters. Id. ¶¶ 89–
92.
In October 2004, Tumis, on behalf of Walgreen, advised Malkin that Walgreen was
interested in doing business directly with Microflo. Id. ¶ 94. In December 2004, Liberty
expressed a willingness to conduct the sale and distribution of the filters between Microflo and
Walgreen at a “reasonable price,” ultimately offering to conduct the sale and distribution at a
10% gross margin. Id. ¶ 102. In January 2005, Liberty and Microflo continued to discuss the
sale. Id. ¶¶ 106–110. By email and a letter dated February 17, 2005, Liberty advised Microflo
that while Liberty “had ‘not been idle on the matter of the contemplated arrangement between
Liberty and Walgreens concerning the Microflo filters’ . . . ‘[it] had been unable to conclude an
arrangement with Walgreens to supply Microflo Filters to Walgreens.” Id. ¶ 115. The letter
further stated that Liberty would thereby not be entering into a contract with Microflo for the
purchase of the filters. Id. Microflo then contacted Walgreen and offered to provide the filters
to Walgreen directly. Id. ¶ 116. Tumis informed Microflo that it had not yet decided on a final
vendor for the filters and that the vendor “may or may not turn out to be Microflo.” Id. ¶ 117. In
May 2006, Malkin learned that Liberty offered to sell Wal-Mart, “Microflo’s largest single
customer of many years standing,” washable, reusable filters for its photo processing machines.
Id. ¶ 120.
Microflo asserted in the Underlying Litigation that, on information and belief, Liberty
never intended to enter into an agreement for the purchase of Microflo’s filters and that it used
the samples Microflo provided to Walgreen, to “reverse engineer the [f]ilters so that Liberty
could design and manufacture its own [f]ilters” to compete with Microflo. Id. ¶¶ 121, 123. In
4
the Underlying Litigation, Microflo alleged among other causes of action, fraud, civil RICO
violations and unfair trade practices.
After the Underlying Litigation was filed in the New York Supreme Court, it was
subsequently removed to the Eastern District of New York. See Notice of Removal, Microflo,
Ltd. v. Liberty Bearing Corp., No. 08-CV-3907, Docket Entry No. 1. 2 On March 19, 2010,
Walgreen and Tumis (collectively the “Walgreens Defendants”) moved to dismiss the Complaint
in the Underlying Litigation for failure to state a claim. See Underlying Litigation, Docket Entry
No. 80. On March 24, 2010, Liberty and the Liberty employee defendants (collectively the
“Liberty Defendants”) moved to dismiss the Underlying Litigation on jurisdictional grounds, and
alternatively requested a change of venue. Id., Docket Entry No. 86. On May 11, 2010, the
Honorable Leonard D. Wexler partially granted the Walgreens Defendants’ motion to dismiss,
dismissing the civil RICO claim with prejudice. Id., Order dated May 11, 2010. The Liberty
Defendants’ motion to dismiss was denied. Id. Pursuant to a stipulation of dismissal dated July
1, 2010, filed by Plaintiff and signed by the parties, the Underlying Litigation was dismissed
with prejudice pursuant to Rule 41(a)(1)(A)(ii) of the Federal Rules of Civil Procedure.
b. History of the instant action
On September 17, 2010, Liberty commenced the above-captioned action in California
state court alleging malicious prosecution against Defendants for bringing the Underlying
Litigation. (Compl., annexed to Notice of Removal, Docket Entry No. 1, as Ex. A.) The action
was removed to the Central District of California by the Defendants on the basis of diversity
2
Documents filed in the Underlying Litigation can be found at docket number 08-CV3907. The Court will refer to all documents filed in the Underlying Litigation with the notation,
“Underlying Litigation,” and reference the docket entry number for the referenced document.
The Court will refer to the date of order when referencing orders or decisions in the Underlying
Litigation without docket entry numbers.
5
jurisdiction. (Docket Entry No. 1.) The parties subsequently stipulated to transfer the case to the
Eastern District of New York as the appropriate venue pursuant to 28 U.S.C. § 1404(a). (Docket
Entry No. 15.)
Plaintiff alleges that Defendants prosecuted the Underlying Litigation without a
“reasonable basis in fact or any probable cause.” 3 (Am. Compl. ¶ 21, Docket Entry No. 80.)
According to Plaintiff, after its initial meeting with Malkin to discuss the sale of Microflo’s
reusable filters, Malkin “maintained that [Microflo] wanted nothing to do with Liberty, wanted
to do no business with Walgreens through Liberty and refused to engage in negotiations . . . to
sell Liberty filters for sale to Walgreens.” (Id. ¶ 13.) The parties were unsuccessful in reaching
a contract for the sale of the filters despite efforts to negotiate. (Id. ¶ 14.) It was only “[a]fter a
careful review to determine the extent, if any, of the intellectual property rights of [Microflo],”
that Liberty developed its own filters and sold them to Walgreens. (Id. ¶ 15.) Liberty asserts
that its filters “are distinct from Microflo’s filters, and have never been sold or offered for sale to
any of Microflo’s filter customers” and Liberty does not “sell all of the same filters for all
models of photographic development machines that Microflo sells.” (Id.) Liberty claims that
Microflo filed the Underlying Litigation to “inflict financial damage on [Liberty], to interfere
with [its] legitimate business, and to attempt to cause monopolization and price fixing in the
business of reusable filters [as well as] to suppress legitimate business competition,” among
other inappropriate motives. (Id. ¶ 20.)
3
The Underlying Litigation was brought by Defendant Microflo. Plaintiff alleges in the
instant action that the remaining Defendants are also liable for malicious prosecution as alter
egos of Microflo. (Am. Compl. ¶¶ 6–7.)
6
c. Defendants’ motion to strike
On August 16, 2011, Defendants filed a Special Motion to Strike the Complaint under
California’s anti-SLAPP statute, seeking dismissal and sanctions. (Docket Entry No. 42.)
According to Defendants, they had a reasonable basis to commence the Underlying Litigation
because Liberty had “engaged in a series of acts and representations that led Microflo to
conclude that Liberty had not acted in good faith and fairly, [and] engaged in unfair trade
practices,” among other specified wrongful conduct. (Id. at 2.) Defendants also claimed that the
prosecution of the Underlying Litigation was “protected activity” under the statute, and Plaintiff
could not establish a reasonable probability of prevailing on its malicious prosecution claim. (Id.
at 15–16, 18–23.) Plaintiff argued that it met its burden under the anti-SLAPP statute by
showing a reasonable probability of success. 4 (Docket Entry No. 35.)
The Honorable Sandra J. Feuerstein referred Defendants’ motion to Magistrate Judge E.
Thomas Boyle for a report and recommendation. 5 (Order dated September 14, 2011.)
d. Judge Boyle’s R&R and adoption by Judge Feuerstein
By Report and Recommendation dated October 18, 2011 (“October 2011 R&R”), Judge
Boyle recommended that Judge Feuerstein deny Defendants’ motion to strike based on New
4
The parties disagree about the choice of law that should be applied to Plaintiff’s
malicious prosecution claim. Defendants argue that New York substantive law should apply
while Plaintiff argues that California substantive law should apply to its malicious prosecution
claim. (Compare Pl. Mem. of Law in Opp. to Mot. to Strike (“Pl. Opp.”) at 8–14, Docket Entry
No. 35 with Def. Reply Mem. of Law in Support of Mot. to Strike (“Def. Reply”) at 4–8, Docket
Entry No. 36.) As discussed infra Part II.c.i, Judge Feuerstein’s determination that New York
law applies to Plaintiff’s malicious prosecution claim is the law of the case, and should be
adhered to unless there has been “an intervening change in law, availability of new evidence, or
the need to correct a clear error or prevent a manifest injustice.” Thompson v. Choinski, 374 F.
App’x 222, 223 (2d. Cir. 2010) (citing Johnson v. Holder, 564 F.3d 95, 99–100 (2d Cir. 2009)).
5
This case was reassigned to the undersigned on March 23, 2012.
7
York law. 6 (October 2011 R&R, Docket Entry No. 45.) Judge Boyle concluded that
California’s anti-SLAPP statute, as substantive law, was inapplicable to this action because the
action was governed by New York substantive law. (Id. at 19–20.) Judge Boyle also concluded
that California’s choice of law rules establish that New York law applies to Plaintiff’s malicious
prosecution claim. (Id. at 15–19.) The parties objected to Judge Boyle’s recommendation. 7
(Docket Entry Nos. 47–57.) Upon de novo review, Judge Feuerstein adopted the portion of
Judge Boyle’s R&R supporting the denial of Defendants’ motion to strike, (“Feurstein
decision”). (Order dated Dec. 1, 2011, Docket Entry No. 60.)
e. Appeal of Judge Feuerstein’s Decision
Defendants appealed Judge Feuerstein’s decision to the Second Circuit. Defendants
argued that Judges Feuerstein and Boyle should have applied California’s anti-SLAPP statute.
(Brief and Special Appendix for Defendants-Appellants, Liberty Synergistics v. Microflo Ltd.,
No. 12-CV-108.) The Second Circuit agreed and determined that, under the governing choice-
6
Though Judge Boyle’s October 26, 2011 decision was labeled as a “Memorandum
Opinion and Order,” Judge Feuerstein clarified in her December 1, 2011 order that because
Defendants’ motion to strike the Complaint was dispositive and the parties did not consent to
referral of the issue to the Magistrate Judge, Judge Boyle’s “Memorandum Opinion and Order”
was deemed to be a report and recommendation subject to review under 28 U.S.C.
§ 636(b)(1)(B). (Order dated December 1, 2011 at 1 n.1, Docket Entry No. 60.)
7
The parties objected to Judge Boyle’s R&R on different grounds. Plaintiff moved to
set aside portions of Judge Boyle’s R&R. (Docket Entry No. 47.) Plaintiff argued that contested
facts were improperly decided in favor of Defendants, and New York substantive law should not
be applied to Plaintiff’s malicious prosecution claim. (Id. at 5–8.) Plaintiff further objected to
the “inference” suggested in dicta in Judge Boyle’s R&R that the doctrine of res judicata could
apply to Plaintiff’s malicious prosecution claim. (Id. at 8.) Defendants objected on the ground
that Judge Boyle incorrectly found that New York law applied to Plaintiff’s malicious
prosecution claim, and thus, according to Judge Boyle, California’s anti-SLAPP law was not
applicable. (Docket Entry No. 48.)
8
of-law principles, California’s anti-SLAPP statute did apply. 8 See Liberty Synergistics v.
Microflo Ltd., 718 F.3d 138, 154–56 (2d Cir. 2013).
The Second Circuit explained that:
[T]he Rules of Decision Act, 28 U.S.C. § 1652, . . . provides that
federal courts exercising diversity jurisdiction over a state-law
claim must consider two conceptually distinct issues. First, a
federal court exercising diversity jurisdiction must apply the
choice-of-law rules of the state in which that court sits to
determine the rules of decision that would apply if the suit were
brought in state court . . . . Second, after using state conflict-oflaws principles to ascertain the rules of decision that would apply
in the state courts of the federal forum, federal courts apply those
state rules of decision that are “substantive” under [the] Erie
[doctrine] and are consistent with federal law.
Id. at 151–52 (internal citations omitted). Considering the first issue, the Second Circuit noted
that Plaintiff originally filed suit in California before transferring the case to the Eastern District
of New York pursuant to 28 U.S.C. § 1404(a). Id. at 153. “[I]n such circumstances, the
governing law ‘does not change following a transfer of venue under § 1404(a).’” Id. (quoting
Ferens v. John Deere Co., 494 U.S. 516, 530 (1989)). Thus, the Second Circuit held that “the
federal court in New York must pretend, for the purpose of determining the applicable state rules
of decision, that it is sitting in California.” Id. at 154.
As to the determination of “[w]hether a particular state rule of decision is ‘substantive’
under [the] Erie [doctrine],” such determination “is a question of federal law,” id. at 152
(emphasis in original), and depends on:
[W]hether application of the [State’s] rule would make so
important a difference to the character or result of the litigation
that failure to enforce it would unfairly discriminate against
8
The Second Circuit determined that Judge Feuerstein’s decision denying Defendants’
motion to strike was a collateral order suitable for interlocutory appeal. Liberty Synergistics v.
Microflo Ltd., 718 F.3d 138, 143 (2d Cir. 2013).
9
citizens of the forum State, or whether application of the rule
would have so important an effect upon the fortunes of one or both
of the litigants that failure to enforce it would be likely to cause a
plaintiff to choose the federal court.
Id. at 152 (quoting Gasperini v. Ctr. For Humanities, Inc., 518 U.S. 415, 428 n.8 (1996) (second
alteration in original)). The Second Circuit noted that it is “immaterial” whether the state rule of
decision “is labelled by state law as ‘procedural,’ ‘substantive,’ both, or neither.” Id. Rather, “if
state conflict of law principles call for a rule of decision (1) that would apply to the suit if it were
brought in state court, (2) that is ‘substantive’ within the meaning [of] Erie, and (3) that is not
displaced by a valid federal law or rule governing the same issue, then the Rules of Decision
Act . . . requires the federal court sitting in diversity to apply the state rule . . . .” Id. at 153.
The Second Circuit determined that it “h[ad] no reason to doubt that a California state
court would apply California’s anti-SLAPP rule as a matter of its own procedural rules . . . .”
(Id. at 154.) The Court noted that the anti-SLAPP rule is in California’s Code of Civil
Procedure, has been described by courts in California as a “procedural remedy” and the “text of
the rule is not limited to causes of action that arise under California law.” Id. The Court further
noted that California courts have also “repeatedly held, as a matter of state law, that California’s
anti-SLAPP rule is ‘procedural’ in nature and therefore applies in California courts regardless of
which source of law governs a plaintiff’s claim.” Id. Accordingly, the Second Circuit held that
since “California’s anti-SLAPP rule would apply to this suit if the claim were proceeding in
California state court . . . . the District Court erred with respect to this issue.” (Id. at 156.) The
Second Circuit vacated Judge Feuerstein’s decision and remanded the case to the Court for
further consideration of the motion to strike. (Id. at 156.)
On June 14, 2013, the Court referred Defendants’ motion to strike to Judge Boyle for a
new report and recommendation consistent with the Second Circuit’s decision. (Order referring
10
motion dated June 14, 2013.) Magistrate Judge William D. Wall replaced Judge Boyle on this
matter on July 15, 2013.
f. Judge Wall’s Report and Recommendation
In his R&R, Judge Wall recommended that the Court dismiss this action pursuant to
California’s anti-SLAPP statute. (R&R, Docket Entry No. 134.) Judge Wall concluded that
Plaintiff could not meet its prima facie burden under the anti-SLAPP statute to show a
“reasonable probability” that it would prevail in its malicious prosecution claim against
Defendants. In particular, Judge Wall found that Plaintiff could not establish a favorable
termination in the Underlying Litigation, a required element to prove a malicious prosecution
claim under New York law. Judge Wall determined that the Underlying Litigation ended when
the parties filed a stipulation of voluntary dismissal pursuant to Rule 41(a)(1)(ii), and concluded
that the termination of the Underlying Litigation under those circumstances — specifically, by
such an agreement between the parties and without an adjudication on the merits — did not
amount to a favorable termination under New York law. 9 (Id. at 13–15.)
g. Plaintiff’s objections to Judge Wall’s R&R
On January 7, 2014, Plaintiff filed objections to Judge Wall’s R&R, arguing that the
R&R ignores certain facts supporting a finding of favorable termination. (Pl. Obj. 5–8.)
Plaintiff also contends that Judge Wall “refus[ed] to reconsider Liberty’s request that the Court
9
In a “supplemental” brief filed in opposition to Defendants’ renewed motion to strike,
Plaintiff reiterated its position that California’s substantive law should apply to the malicious
prosecution claim, not New York’s substantive law. (See R&R 10.) Judge Wall found that this
issue was not before him and noted that Judge Boyle analyzed this issue in detail in his prior
R&R, that Judge Feuerstein agreed with Judge Boyle’s ruling, and that the Second Circuit
specifically avoided considering the issue. (Id. at 10–11.) As discussed supra in Part II.c.i, the
Court agrees with the determination by Judge Wall that Judge Feuerstein’s prior decision as to
this issue is the law of the case.
11
re-examine whether California or New York state law should apply” to the malicious prosecution
claim. 10 (Id. at 2, 9–10.) Plaintiff requests that the Court review Judge Wall’s R&R de novo.
(Id. at 10.)
II. Discussion
a. Standard of Review
A district court reviewing a magistrate judge’s recommended ruling “may accept, reject,
or modify, in whole or in part, the findings or recommendations made by the magistrate judge.”
28 U.S.C. § 636(b)(1)(C). When a party submits a timely objection to a report and
recommendation, the district court reviews the parts of the report and recommendation to which
the party objected under a de novo standard of review. 28 U.S.C. § 636(b)(1)(C); see also
Larocco v. Jackson, No. 10-CV-1651, 2010 WL 5068006, at *2 (E.D.N.Y. Dec. 6, 2010). The
district court may adopt those portions of the recommended ruling to which no timely objections
have been made, provided no clear error is apparent from the face of the record. 28 U.S.C.
§ 636(b)(1)(C); see also Larocco, 2010 WL 5068006, at *2. The clearly erroneous standard also
applies when a party makes only conclusory or general objections, or simply reiterates its
original arguments. See Rahman v. Fischer, No. 10-CV-1496, 2014 WL 688980, at *1
(N.D.N.Y. Feb. 20, 2014) (“If no objections are made, or if an objection is general, conclusory,
perfunctory, or a mere reiteration of an argument made to the magistrate judge, a district court
need review that aspect of a report-recommendation only for clear error.” (citations omitted));
10
Plaintiff raises three additional objections. First, Plaintiff contends that the R&R
“incorrectly takes as true that Liberty approached Microflo’s customer Wal-Mart seeking to sell
it filters.” (Pl. Obj. 9.) Second, Plaintiff “objects to the pending motion, memoranda in support
of said motion, and reply, being referred to as ‘supplemental papers ’” by Judge Wall. (Id.)
Plaintiff further objects to “the manner in which [Judge Wall applied] California law . . . to the
analysis of the Anti-SLAPP motion,” in particular, Plaintiff claims that Judge Wall did not
identify what evidence submitted by Defendants defeats Plaintiff’s prima facie case as a matter
of law. (Id. at 2.)
12
Time Square Foods Imports LLC v. Philbin, No. 12-CV-9101, 2014 WL 521242, at *2 (S.D.N.Y.
Feb. 10, 2014) (clearly erroneous standard applies when party reiterates arguments made to the
magistrate judge); see also DePrima v. City of New York Dep’t of Educ., No. 12-CV-3626, 2014
WL 1155282, at *3 (E.D.N.Y. Mar. 20, 2014) (collecting cases).
b. California’s anti-SLAPP statute
California’s anti-SLAPP statute was “designed to allow courts to promptly expose and
dismiss meritless and harassing claims seeking to chill protected expression.” Mindys
Cosmetics, Inc. v. Dakar, 611 F.3d 590, 595 (9th Cir. 2010) (citing Bosley Med. Inst., Inc. v.
Kremer, 403 F.3d 672, 682 (9th Cir. 2005)). The statute generally provides for “pre-trial
dismissal of ‘SLAPPs’: ‘Strategic Lawsuits against Public Participation . . . .’” which are
“lawsuits that ‘masquerade as ordinary lawsuits’ but are brought to deter common citizens from
exercising their political or legal rights or to punish them for doing so.” Batzel v. Smith, 333
F.3d 1018, 1023 (9th Cir. 2003) (citing Wilcox v. Superior Court, 33 Cal. Rptr. 2d 446, 450
(1994), overruled on other grounds, Equilon Enter. v. Consumer Cause, Inc., 124 Cal. Rptr. 2d
507, 519 (2002)) (internal citation omitted). California’s anti-SLAPP statute provides in
pertinent part that:
A cause of action against a person arising from any act of that
person in furtherance of the person’s right of petition or free
speech under the United States Constitution or the California
Constitution in connection with a public issue shall be subject to a
special motion to strike, unless the court determines that the
plaintiff has established that there is a probability that a plaintiff
will prevail on the claim.
Cal C.C.P. § 425.16. “Acts in furtherance of the right of petition include ‘any written or oral
statement or writing made in connection with an issue under consideration or review by a . . .
judicial body.’” Graham-Sult v. Clainos, 756 F.3d 724, 735 (9th Cir. 2014) (alteration in
13
original) (quoting Cal.C.C.P § 425.16(e)(2)). An action for malicious prosecution may be
challenged under California’s anti-SLAPP law. Jarrow Formulas, Inc. v. LaMarche, 74 P.3d
737, 742 (Cal. 2003) (“The anti-SLAPP statute is not ambiguous with respect to whether its
protection of ‘any act’ furthering protected rights encompasses suing for malicious
prosecution.”).
“In order to prevail on an anti-SLAPP motion, the defendant is required to make a prima
facie showing that the plaintiff’s suit arises from an act by the defendant made in connection
with a public issue in furtherance of the defendant’s right to free speech . . . .” 11 Batzel, 333 F.3d
at 1024. After the defendant has made a prima facie showing, “[t]he burden then shifts to the
plaintiff to establish a reasonable probability that the plaintiff will prevail on his or her . . .
claim.” Id. In order to meet this burden, “[t]he plaintiff must demonstrate that the ‘complaint is
legally sufficient and supported by a prima facie showing of facts to sustain a favorable
judgment if the evidence submitted by plaintiff is . . . credited.’” Id. (quoting Metabolife Int’l,
Inc. v. Wornick, 264 F.3d 832, 840 (9th Cir. 2001)).
In assessing an anti-SLAPP motion under California law, a court must consider “the
pleadings, and supporting and opposing affidavits . . . upon which the liability or defense is
based,” but may not “weigh credibility [nor] compare the weight of the evidence . . . . [r]ather,
[the court] accept[s] as true the evidence favorable to the plaintiff . . . and evaluate[s] the
defendant’s evidence only to determine if it has defeated that submitted by the plaintiff as a
11
The parties do not appear to dispute that Defendants have met their prima facie burden
by alleging that the Underlying Litigation constitutes an act “in furtherance of . . . free speech”
under the statute. Indeed, Section 425.16(e)(1) of the California Code of Procedure defines an
“act in furtherance of a person’s right of petition or free speech . . . in connection with a public
issue” to include “any written or oral statement or writing made before a legislative, executive,
or judicial proceeding,” and “any written or oral statement or writing made in connection with an
issue under consideration or review by a legislative, executive, or judicial body, or any other
official proceeding authorized by law.” Cal. C.C.P. § 425.16(e)(1)–(2).
14
matter of law.” Roger Cleveland Golf Co., Inc. v. Krane & Smith APC, 170 Cal. Rptr. 3d 431,
449 (Ct. App. 2014) (quoting Nygard, Inc. v. Uusi-Kerttula, 72 Cal. Rptr. 3d 210, 215 (Ct. App.
2008)). A plaintiff is not required to prove the merits of a particular claim on an anti-SLAPP
motion but must “demonstrate that the complaint is both legally sufficient and supported by a
sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted
by the plaintiff is credited.” Burrill v. Nair, 158 Cal. Rptr. 3d 332, 348 (Ct. App. 2013) (quoting
Oasis West Realty, LLC v. Goldman, 124 Cal Rptr. 3d 256, 262 (2011)). It is not a court’s task
on a motion to strike “to resolve factual disputes or make credibility determinations.” Freeman
v. Schack, 64 Cal. Rptr. 3d 867, 878 (Ct. App. 2007). If a case survives an anti-SLAPP motion
to strike, the statute no longer applies and the matter will proceed to litigation on the merits. Id.;
Optinrealbig.com, LLC v. Ironport Sys., Inc., No. No. 04-CV-1687, 2004 WL 1737275, at *2
(N.D. Cal. July 28, 2004) (“Once the plaintiff’s case has survived the motion, the anti-SLAPP
statute no longer applies and the parties proceed to litigate the merits of the action.”).
c. Review of Judge Wall’s R&R
The Court agrees with Judge Wall that the question of which substantive law applies to
the determination of whether Plaintiff can sustain its malicious prosecution claim against
Defendants is not properly before the Court. The Court therefore adopts this portion of the R&R.
However, the Court disagrees with Judge Wall’s conclusion that, because the stipulation of
dismissal filed in the Underlying Litigation was signed by the parties and “agreed to,” Plaintiff
cannot show a favorable termination of the Underlying Litigation, and therefore fails to meet its
burden under California’s anti-SLAPP statute. The Court declines to adopt this portion of the
R&R.
15
i. Application of New York substantive law is the law of the case
Plaintiff argues that the Amended R&R “disregards the choice of law analysis applied by
the Second Circuit with regard to the choice of law determination for the malicious prosecution
claim.” (Pl. Obj. 9.) Plaintiff contends that the Second Circuit’s analysis “is instructive” to the
“choice of law analysis application to this case’s unique posture,” and if the Court were to apply
the Second Circuit’s analysis, “it would yield a different result,” than the result previously
reached by Judge Feuerstein and Judge Boyle. (Id. at 9.) Judge Wall determined that the issue
of the substantive law applicable to Plaintiff’s malicious prosecution claim was not before the
Court on this “renewed motion” to strike. (R&R 10.) Judge Wall explained that Judge Boyle
previously considered this issue “in detail,” Judge Feuerstein agreed and adopted his ruling, and
the Second Circuit “specifically avoided considering the issue” as it was not a collateral order
suitable for Defendants’ interlocutory appeal. (Id. at 11.) Accordingly, Judge Wall determined
that the application of New York law to the malicious prosecution claim is the law of the case.
(Id.) The Court agrees.
“The law of the case doctrine ‘commands that when a court has ruled on an issue, that
decision should generally be adhered to by that court in subsequent stages in the same case,’
unless there has been ‘an intervening change in law, availability of new evidence, or the need to
correct a clear error or prevent a manifest injustice.’” Thompson v. Choinski, 374 F. App’x 222,
223 (2d Cir. 2010) (citing Johnson v. Holder, 564 F.3d 95, 99–100 (2d Cir. 2009)). In the
October 2011 R&R, Judge Boyle considered the issue of whether, under California’s choice of
law rules, New York substantive law or California substantive law governs Plaintiff’s malicious
prosecution claim and determined that New York substantive law applies. (October 2011 R&R
16
19.) Notwithstanding Plaintiff’s objection to this choice of law conclusion, Judge Feuerstein
accepted it “in its entirety.” (Feuerstein decision 3.)
Moreover, the Second Circuit in Liberty Synergistics explicitly did not address whether
California or New York substantive law should be applied to the merits of the malicious
prosecution claim. Liberty Synergistics, 718 F.3d at 149 (“[W]e are able to review the District
Court’s order with respect to the anti-SLAPP issue without addressing the District Court’s
decision that New York law governs the malicious prosecution claim [because] the question
raised in this appeal presents an important issue completely separate from the merits of the
action.’” (internal citations and quotation marks omitted)); see also id. at 157 (“[T]he District
Court erred in its choice-of-law analysis by concluding that California’s anti-SLAPP rule could
not apply following the forum transfer because New York law governed the plaintiff’s cause of
action.”). Thus, contrary to Plaintiff’s suggestion, the Second Circuit’s decision does not
represent an intervening change in law and has no bearing on the choice of law determination as
to which substantive law applies to Plaintiff’s malicious prosecution claim. Accordingly, the
application of New York law to the merits of Plaintiff’s claim is the law of the case, and the
Court has no basis to disturb this determination. 12
12
Even if the Court were to determine that it could review the choice of law
determination, it would reach the same conclusion as Judges Boyle and Feuerstein. Judge Boyle
applied California choice of law rules to reach his conclusion that New York substantive law
applies. (October 2011 R&R 15–19.) The Second Circuit’s opinion in this case confirms that
California choice of law rules are the proper rules to be applied. Liberty Synergistics, 718 F.3d
at 153 (“[T]he governing law ‘does not change following a transfer of venue under § 1404(a)
. . . . Here, that means that the federal court in New York must pretend, for the purpose of
determining the applicable state rules of decision, that it is sitting in California.”). The
distinction between the analyses of Judges Boyle and Feuerstein and the Second Circuit are due
in part to the fact that while Judges Boyle and Feuerstein found California’s anti-SLAPP law to
be substantive law and therefore not applicable, the Second Circuit clarified that a California
state court would apply its own anti-SLAPP procedural law “regardless of which source of law
governs a Plaintiff’s claim.” Id. at 154.
17
ii. Viability of Plaintiff’s malicious prosecution claim
Judge Wall concluded that Plaintiff could not meet its burden under California’s antiSLAPP law of showing a “reasonable probability” of prevailing in this action because Plaintiff
could not show that the Underlying Litigation was terminated in its favor — an element that is
necessary to sustain a malicious prosecution claim under New York law. 13 In support of this
conclusion, Judge Wall noted that there appears to be two ways to show favorable termination
under New York law: (1) an adjudication on the merits, or (2) an act of withdrawal or
abandonment on the part of the party prosecuting the action. (R&R 14.) Judge Wall noted that
there was no determination on the merits in the Underlying Litigation, and the Underlying
Litigation was terminated by a stipulation of dismissal. (Id. at 15.) Judge Wall then concluded
that the stipulation of dismissal did not represent an abandonment as “[b]oth parties agreed to it
and signed on” to the stipulation of dismissal and an action terminated by settlement or
“agreement by the parties” is not a “favorable termination” for the purposes of a malicious
prosecution claim. (R&R 13–15.) Thus, Judge Wall determined that Plaintiff could not establish
a favorable termination — an “essential element of its cause of action” — and therefore,
recommended that the Amended Complaint be dismissed pursuant to California’s anti-SLAPP
statute. (Id. at 15.) The Court disagrees with Judge Wall’s conclusion that the stipulation of
dismissal mandates a finding that Plaintiff cannot show a favorable termination of the
Underlying Litigation.
13
To state a claim under New York law for the malicious prosecution of a civil action, a
plaintiff must show “1) the initiation of an action by the defendant against [plaintiff], 2) begun
with malice, 3) without probable cause to believe it can succeed, 4) that ends in failure or, in
other words, terminates in favor of the plaintiff” and 5) causing special injury. Engel v. CBS,
145 F.3d 499, 502 (2d Cir. 1998) (quoting O’Brien v. Alexander, 101 F.3d 1479, 1484 (2d Cir.
1996)); Castro v. East End Plastic, Reconstructive & Hand Surgery, P.C., 850 N.Y.S.2d 483,
485 (App. Div. 2008)
18
d. Plaintiff’s malicious prosecution claim
To state a claim under New York law for the malicious prosecution of a civil action, a
plaintiff must show “1) the initiation of an action by the defendant against [him], 2) begun with
malice, 3) without probable cause to believe it can succeed, 4) that ends in failure or, in other
words, terminates in favor of the plaintiff” and 5) causes special injury. Engel v. CBS, 145 F.3d
499, 502 (2d. Cir. 1998) (quoting O’Brien v. Alexander, 101 F.3d 1479, 1484 (2d. Cir. 1996)
(internal quotation marks omitted)); Castro v. East End Plastic, Reconstructive & Hand Surgery,
P.C., 850 N.Y.S.2d 483, 485 (App. Div. 2008). The Court first reviews the stipulation of
dismissal in the Underlying Litigation, and then examines each of the elements of a malicious
prosecution claim to determine whether Plaintiff has a reasonable probability of prevailing on its
claim.
i. The stipulation of dismissal
The Underlying Litigation was terminated by a stipulation of dismissal filed pursuant to
Rule 41(a)(1)(ii) of the Federal Rules of Civil Procedure. 14 The stipulation of dismissal provided
that, “Pursuant to F.R.C.P. 41(a)(1)(ii), the Plaintiff in this matter hereby stipulates and agrees
that the action herein is hereby dismissed with prejudice and with each party bearings its (their)
own costs.” 15 Underlying Litigation, Docket Entry No. 116. Under Rule 41(a)(1), a plaintiff
14
Rule 41(a)(1) of the Federal Rules of Civil Procedure governs voluntary dismissals by
a plaintiff and its “purpose . . . is to facilitate voluntary dismissals, but to limit them to an early
stage of the proceedings before issue is joined,” Harvey Aluminum, Inc. v. American Cyanamid
Co., 203 F. 2d 105, 107–08 (2d. Cir. 1958); ISC Holding AG v. Nobel Biocare Investments N.V.,
759 F. Supp. 2d 294, 295 (S.D.N.Y. 2010).
15
The stipulation of dismissal filed in the Underlying Litigation is annexed to the
Supplemental Declaration of Dennis H. Sabourin, Esq. in Support of Special Motion to Strike
Complaint for Malicious Prosecution per Cal. CCP 425.16 (“Sabourin Decl.”) as Exhibit G. On
a motion to strike pursuant to California’s anti-SLAPP law, the Court considers “the pleadings,
and supporting and opposing affidavits stating the facts upon which the liability or defense is
based.” Cal Civ. Proc. Code § 425.16(b)(2).
19
may voluntarily withdraw an action without a court order by filing either, (1) “a notice of
dismissal before the opposing party serves either an answer or a motion for summary judgment,”
or (2) “a stipulation of dismissal signed by all parties who have appeared.” Fed. R. Civ. P.
41(a)(1)(i)–(ii). Because Plaintiff (as well as the other defendants in the Underlying Litigation)
appeared in the Underlying Litigation, see Underlying Litigation, Docket Entry Nos. 106–114,
Microflo could only voluntarily withdraw its claims in the Underlying Litigation, without
seeking leave of court, by filing a “stipulation of dismissal signed by all parties who have
appeared.” F.R.C.P. 41(a)(1)(ii). The requirement under Rule 41(a)(1)(ii) that “the parties
consent to a filed stipulation is to ensure that the plaintiff will not be able to dismiss voluntarily a
claim at a late stage of the action without the defendant’s consent.” Baksh v. James Capt. &
Citibank N.A., No. 99-CV-1806, 2000 WL 33177209, at *3 (E.D.N.Y. Dec. 11, 2000) (citing 8
Moore’s Federal Practice § 41.34[1] (3rd ed.)). The Court finds that, contrary to Judge Wall’s
finding, the parties’ signatures and agreement to the stipulation of dismissal are not
determinative of whether the Underlying Litigation was terminated in favor of Plaintiff, as it
merely reflects compliance with Rule 41(a)(1)(ii) of the Federal Rules of Civil Procedure. As
the Court disagrees with Judge Wall’s conclusion regarding the significance of the parties’
signature on the stipulation of dismissal to the issue of favorable termination, the Court considers
below whether Plaintiff has sufficiently stated that the Underlying Litigation was terminated in
its favor.
ii. Favorable termination
Under New York law, there are two ways to establish favorable termination: “(1) ‘an
adjudication of the merits by the tribunal in the prior action,’ or (2) ‘an act of withdrawal or
20
abandonment on the part of the party prosecuting the prior action.’” Morgan v. Nassau County,
No. 03-CV-5109, 2009 WL 2882823, at *8 (E.D.N.Y. 2009) (quoting O’Brien, 101 F.3d
at 1486); Castro, 850 N.Y.S.2d at 485 (“The favorable termination element must be established
by evidence that ‘the court passed on the merits of the charge or claim . . . under circumstances
as to show . . . nonliability,’ or evidence that the action was abandoned under circumstances
which ‘fairly imply the plaintiff’s innocence.’”) (citation and internal quotation marks omitted).
The Court finds that Plaintiff has alleged sufficient facts to establish that the Underlying
Litigation was favorably terminated through an act of withdrawal or abandonment. 16
16
Defendants argue that while “older New York case law” indicates that a favorable
termination can be shown by evidence that the underlying action was abandoned by the
prosecuting party, “the progression of cases since then has marched steadily in the direction of
eliminating the concept that plaintiff’s abandonment of an underlying litigation constitutes a
favorable termination.” (Def. Supp. Mem 21.) Judge Wall also questioned in his R&R whether
under current New York law, a favorable termination can be established by showing
abandonment by the prosecuting party. As Judge Wall explained, the Second Circuit in O’Brien
noted that recent “cases . . . seem to cast doubt on the viability of the . . . the abandonment prong
. . . of proving favorable termination.” O’Brien, 101 F.3d at 1486. To explain this trend, the
O’Brien court discussed two New York Court of Appeals cases, MacFawn v. Kresler, 88 N.Y.2d
859 (1996) and Hollender v. Trump Vill. Coop., 58 N.Y.2d 420 (1983). In both cases, the Court
of Appeals dismissed plaintiffs’ malicious prosecution claims stating they could not show
favorable termination because there was no adjudication on the merits — seemingly ignoring the
abandonment prong. MacFawn, 88 N.Y.2d at 860 (explaining that “[m]anifestly, the criminal
action was disposed of on procedural grounds [and] [t]he court did not reach the merits”);
Hollender v. Trump Vill. Coop., Inc., 58 N.Y.2d at 425–426 (“[I]t is only when [the] . . . final
disposition is such as to indicate innocence that this burden [of favorable termination] is met.”
(citations and internal quotation marks omitted)). Given the fact that in MacFawn, Hollender,
and in other intermediate appellate court decisions, the courts focused on whether the merits of
the case had been adjudicated in determining whether there was a favorable determination, the
Second Circuit in O’Brien questioned whether current New York law reflects a rejection of the
abandonment prong.
However, since O’Brien, the New York Court of Appeals has clarified the issue, stating
that its “holdings in . . . Hollender and MacFawn stand only for the proposition that dispositions
inconsistent with innocence, like the ones in those cases, cannot be viewed as favorable to the
accused.” Smith-Hunter v. Hunter, 95 N.Y.2d 191, 199 (2000). The court in Smith-Hunter
found that a dismissal without prejudice “qualifies as a final, favorable termination” if it reflects
“the formal abandonment of the proceedings by the public prosecutor.” Id. at 198. Moreover,
recent cases confirm that a favorable termination can still be established by showing that the
21
Plaintiff argues that Defendant Microflo’s voluntary dismissal of the Underlying
Litigation, as indicated by the stipulation of dismissal, constitutes a favorable termination. (Pl.
Supp. Opp. 11.) While there is limited New York case law addressing whether, and to what
extent, a voluntary dismissal of an underlying action can satisfy the favorable termination
element of a malicious prosecution claim, the available case law supports a finding that a
voluntary dismissal can be a favorable termination if (1) it was not pursuant to a settlement
agreement or compromise, or (2) the circumstances under which the action was dismissed are not
inconsistent with innocence. 17 See Cantalino v. Donner, 96 N.Y.2d 391, 395–96 (2001) (action
underlying action was abandoned. See Hudson Val. Mar., Inc. v. Town of Cortlandt, 912 N.Y.S.
2d 623, 626 (App. Div. 2010) (“The favorable termination element must be established by
evidence that the ‘court passed on the merits of the charge or claim . . . or evidence that the
action was abandoned under circumstances ‘which fairly imply the plaintiff’s innocence.’”
(quoting Castro v. East End Plastic, Reconstructive and Hand Surgery, P.C., 850 N.Y.S.2d 483,
485 (App. Div. 2008))); Furgang & Adwar, LLP v. Fiber-Shield Indus., Inc., 866 N.Y.S.2d 250,
251 (App. Div. 2008) (“To show a termination in [its] favor, the plaintiff must prove that the
court passed on the merits of the charge or claim against [it] under such circumstances as to
show [its] innocence or nonliability, or show that the proceedings were terminated or abandoned
at the instance of the defendant under circumstances which fairly imply the plaintiff’s
innocence.” (emphasis added) (alterations in original) (quoting Pagliarulo, 293 N.Y.S.2d 13, 15
(App. Div. 1968))). The Court follows the more recent case law from the New York state courts
in concluding that a plaintiff may establish a favorable termination by showing an abandonment
or withdrawal by the prosecuting party.
17
The Court notes that the relevant jurisprudence regarding favorable termination is, at
times, incongruous. First, as noted by Judge Wall, there is caselaw that an action terminated by
settlement or agreement cannot, as a matter of law, be considered favorably terminated for the
purposes of a malicious prosecution action. Smith-Hunter, 95 N.Y.2d at 196 (“A termination is
not favorable to the accused . . . if the charge is withdrawn or the prosecution abandoned
pursuant to a compromise with the accused.”); Rubin v. Lufty, 906 N.Y.S. 2d 783, 783 (Sup. Ct.
N.Y. Cnty. 2009) (“[W]here a defendant withdrew its prior civil action against the plaintiff as
part of a settlement agreement, it cannot be said that the prior action was terminated in the
plaintiff’s favor.”). However, there is also case law supporting the notion that favorable
termination can be established by evidence that the claims were abandoned or withdrawn.
Castro, 850 N.Y.S. 2d at 485 (“The favorable termination element must be established by
evidence that the court passed on the merits of the charge or claim . . . under such circumstances
as to show . . . nonliability, or evidence that the action was abandoned under circumstances
which fairly imply the plaintiff’s innocence.” (citation and internal quotation marks omitted));
22
terminated by formal abandonment under circumstances “not inconsistent with innocence” meets
favorable termination element); Aquilina v. O’Connor, 399 N.Y.S.2d 919, 921 (App. Div. 1977)
(favorable termination element satisfied by action terminated not by settlement or compromise).
The Court addresses both of these principles below.
1. There was no settlement or compromise
The parties dispute whether the stipulation of dismissal was the product of a settlement
agreement between the parties or reflected an abandonment of the claims in the Underlying
Litigation by Defendant Microflo. Defendants argue that the stipulation of dismissal was filed
pursuant to a settlement agreement between Defendant Microflo and Plaintiff and that in fact,
Plaintiff initiated the prospect of settlement via the stipulation of dismissal. (Def. Supp. Mem.
16.) Plaintiff contends that while it offered to settle the Underlying Litigation between February
27, 2009 and December 22, 2009, each of those settlement offers were ignored, and thus, lapsed,
or were outright rejected by Defendant Microflo. (Pl. Supp. Mem. 12–13.) Thus, Plaintiff
argues that the stipulation of dismissal was not the result of a settlement or compromise but
instead, reflects Defendant Microflo’s voluntary dismissal of the Underlying Litigation. (Id.
at 11–12.)
Verboys v. Town of Ramapo, 785 N.Y.S.2d 496, 497 (App. Div. 2004) (Favorable termination
can be shown by “the formal abandonment of the proceedings.”). While the Court agrees with
the well-reasoned approach by the New York courts to preclude a favorable termination finding
for cases that were terminated pursuant to a settlement or compromise of the parties, the Court
concludes that here, where there is a stipulation of withdrawal pursuant to Rule 41(a)(1) and the
parties dispute the reason for the stipulation of dismissal, the Court cannot conclude as a matter
of law that the stipulation of dismissal reflects a settlement or compromise of the parties. Rule
41(a)(1) governs the voluntary dismissal of a claim by a plaintiff, and while it may require the
signatures of all the parties who have appeared in the proceeding, this requirement does not
convert a stipulation filed for the purpose of withdrawing a claim into a settlement agreement
between the parties to mutually discontinue litigation.
23
It is well-settled that an action terminated by settlement cannot sustain a malicious
prosecution claim. Smith-Hunter, 95 N.Y.2d at 196; Rubin, 906 N.Y.S. 2d at 783; see also Tray
Wrap, Inc. v. Pacific Tomato Growers Ltd., 856 N.Y.S.2d 503, 2008 WL 222495, at *13 (Sup
Ct. Bronx Cnty. Jan. 25, 2008) (citing Aquilina, 59 A.D.2d 454 and Louis J. Sigl, Inc. v.
Brsnahan, 215 N.Y.S. 735 (App. Div. 1926) for the proposition that “discontinuance by plaintiff
in a prior action . . . was a favorable termination when and if the evidence demonstrated that the
discontinuance was not induced by the defendant in the prior action or was the result of a
compromise”). Thus, if the stipulation of dismissal reflects a settlement agreement between the
parties, Plaintiff cannot state a claim for malicious prosecution. The stipulation of dismissal
states that “the Plaintiff in [the Underlying Litigation] hereby stipulates and agrees that the action
herein is hereby dismissed with prejudice and with each party bearing its (their) own costs.”
(Stipulation of Dismissal, Sabourin Decl. Ex. G.) The stipulation of dismissal does not indicate
that the parties reached a settlement agreement.
Under New York law, “[w]hen a termination is indecisive because it does not address the
merits of the charge,” and there is a dispute as to the facts surrounding the termination of the
action, the question of whether the underlying action was terminated in favor of the plaintiff is a
question of fact, requiring a trial on the merits of the case. Tommy Hilfiger Lic. Inc., 2002 WL
737477, at *5; see also Rounseville v. Zahl, 13 F.3d 625, 629 (2d Cir. 1994) (“[W]hen the
grounds for the dismissal of a criminal proceeding are unclear, New York courts consider
whether the proceeding was terminated in plaintiff’s favor to be a question of fact that prevents
summary judgment.”).
Here, the parties dispute whether there was a settlement. Since the language of the
stipulation of dismissal does not indicate a settlement and the parties disagree as to whether there
24
was a settlement, crediting Plaintiff’s factual allegations that the stipulation of dismissal was not
the result of a settlement agreement with Defendant Microflo, as the Court is required to do, the
Court cannot conclude that there was a settlement or compromise of the claims in the Underlying
Litigation.
2. The discontinuance could be a favorable termination
Plaintiff argues that “a voluntary dismissal that is not the result of a settlement or
compromise is a favorable termination.” (Pl. Supp. Opp. 11.) Defendants argue that even if the
stipulation of dismissal was not the result of a settlement agreement, “the procedural background
[of the Underlying Litigation] proves that the dismissal still could not be deemed a ‘favorable
termination.’” (Def. Supp. Mem. 22.) Defendants contend that because Plaintiff’s motions to
dismiss the Underlying Litigation for failure to state a claim and for lack of jurisdiction were
denied, except for one claim, the complaint in the Underlying Litigation “stated a viable cause of
action.” (Id.) Defendants further argue that this “record confirms” that the Underlying
Litigation was terminated as a result of practical considerations including the “state of the
industry” and the expenses involved in prosecuting the action, not as Plaintiff claims, because
“the merits of the action would not result in a favorable termination.” (Id. at 23.)
The Court rejects Defendants’ arguments. First, the fact that Plaintiff’s motions to
dismiss the Underlying Litigation were denied is not determinative of whether the Underlying
Litigation was terminated in favor of Plaintiffs. Determining whether a proceeding ended in a
favorable termination requires the Court to evaluate the circumstances under which the
underlying action was terminated. It does not necessarily require the Court to assess the viability
25
of the underlying claims. 18 Second, Defendants’ argument that Defendant Microflo withdrew
the Underlying Litigation due to “practical considerations” and not based on a “determination
that the merits of the case would not result in a favorable outcome,” simply raises a factual
question as to the circumstances leading to the termination of the Underlying Litigation, and
does not demonstrate as a matter of law that Plaintiff fails to meet the favorable termination
element.
Plaintiff’s argument that a “voluntary dismissal that is not the result of a settlement or
compromise is a favorable termination” is supported by New York case law. Aquilina, 399
N.Y.S.2d at 921; Mobile Training & Educ., Inc. v. Aviation Ground Schools of America
(“Mobile Training”), 28 Misc. 3d 1226(A), 958 N.Y.S.2d 61 (Sup. Ct. N.Y. Cnty. 2010). In
Aquilina, the Third Department rejected the argument that an action discontinued with prejudice
“is not a favorable termination sufficient to support a later cause of action . . . for malicious
prosecution.” 399 N.Y.S.2d at 921. Instead, the court stated that “the more realistic view, as
well as the weight of authority,” demonstrates that “in the absence of a compromise or
inducement offered by the defendant in the primary action, the voluntary discontinuance by the
plaintiff therein is tantamount to a successful termination of such action in favor of the defendant
therein.” Id. (citations omitted). Similarly, in Mobile Training, 28 Misc. 3d 1226(A), a New
York County Supreme Court decision, the court noted that “[t]he question of whether . . . a
voluntary dismissal qualifies as termination in favor of the plaintiff is unresolved in New York,”
but concluded that as long as the voluntary dismissal did not stem from a settlement or
compromise between the parties, it was sufficient to state a malicious prosecution claim. 28
18
The viability of the underlying claims may be relevant to the probable cause
determination which the Court discusses below in Part II.d.iii.
26
Misc. 3d 1226A, at *8. Here, the stipulation of dismissal indicates that the Underlying Litigation
was terminated pursuant to a voluntary dismissal and as the Court has credited Plaintiff’s
allegation that this stipulation does not reflect a settlement or compromise, the Court finds that
this is sufficient to satisfy the favorable termination element of a malicious prosecution claim.
3. Discontinuance not inconsistent with innocence
The “formal abandonment” of an action under circumstances “not inconsistent with
innocence” can also satisfy the favorable termination element of a malicious prosecution claim.
Cantalino v. Donner, 96 N.Y.2d 391, 395–96 (2001). The question of whether an abandonment
of a prosecution, “resulting in a termination ‘with prejudice’ . . . constitutes a termination
favorable to the accused . . . generally depends on the cause of the abandonment.” Murphy v.
Lynn, 118 F.3d 938, 949 (2d Cir. 1997). Where the abandonment “was the result of a
compromise . . . an act of mercy requested or accepted by the accused, or misconduct by the
accused, it is not” a favorable termination. Id. Where, however, the action was terminated by
abandonment under circumstances not “inconsistent with innocence,” it is a favorable
termination. See Mangino v. Incorporated Village of Patchogue, 739 F. Supp. 2d 205, 228
(E.D.N.Y. 2010) (“New York law does not require a malicious prosecution plaintiff to prove her
innocence, or even that the termination of the . . . proceeding was indicative of innocence.
Instead, the plaintiff’s burden is to demonstrate a final termination that is not inconsistent with
innocence.”). Thus, under certain circumstances, a voluntary dismissal can be a favorable
termination, depending on the cause of the dismissal. Chimurenga v. City of New York, 45 F.
Supp. 2d 337 (S.D.N.Y. 1999) (collecting cases). 19
19
In Chimurenga v. City of New York, the court considered whether there was a
favorable termination where criminal charges were “voluntarily dismissed” on a motion from the
prosecutor. 45 F. Supp. 2d 337, 343 (S.D.N.Y. 1999). The court noted that this issue presented
27
Here, there is a reasonable probability that the Underlying Litigation was favorably
terminated. First, the stipulation of dismissal on its face indicates that Defendant Microflo
terminated the Underlying Litigation with prejudice by voluntary dismissal, without any
settlement or compromise since none is mentioned, and, crediting Plaintiff’s factual allegation,
the Underlying Litigation was not terminated pursuant to a settlement. As the courts in Aquilina
and Mobile Training found, this alone is sufficient to create a triable issue of fact as to whether
there is a favorable termination. In addition, the stipulation of dismissal was filed six months
after Plaintiff’s last settlement offer but one month after the court sua sponte dismissed
Defendant Microflo’s civil RICO claim. These circumstances are not inconsistent with
Plaintiff’s innocence.
Under the circumstances of this case, Plaintiff has sufficiently alleged disputable issues
of fact as to whether the Underlying Litigation was abandoned by Defendant Microflo and thus,
terminated in Plaintiff’s favor. 20 See Verboys, 785 N.Y.S.2d at 497 (favorable termination where
a “nice question” because “even though there are many situations in which a voluntary dismissal
does not constitute a favorable termination on the merits, there are circumstances in which even a
bare voluntary dismissal may, in context, indicate the innocence of the accused.” Id. The court
noted that to determine whether a voluntary dismissal is “indicative of innocence requires a
careful examination of the record.” Id. The prosecutor’s motion to dismiss was “based upon
[plaintiff’s] background and [its] review of the facts” and the court concluded that while this
basis for dismissal was “ambiguous,” it raised a reasonable probability that the dismissal was
sought and obtained due to a lack of evidence which would constitute favorable termination.
The court concluded that based on this triable issue of fact, summary judgment was not
appropriate on the issue of favorable termination. Id.
20
Plaintiff also vaguely alleged in its brief before Judge Wall that “stipulations
dismissing actions ‘with prejudice’ have the effect of a final adjudication on the merits favorable
to the defendants and barring future suits upon the same causes of action.” (Pl. Supp. Mem. 11
(citing Nance v. NYPD, 31 F. App’x 30 (2d Cir. 2002)). Defendants objected to Plaintiff’s
reliance on Nance on the basis that the Second Circuit was not considering whether the favorable
termination element was satisfied in a malicious prosecution claim in that case, but rather
whether a plaintiff could reopen an action that was already settled and closed pursuant to a
28
“although the initial criminal proceeding against the plaintiff . . . was dismissed without
prejudice, the record demonstrates that the prosecution undertook a full investigation and elected
not to proceed with the charges because it determined that the allegations against the plaintiff
were not supported by the evidence”).
Having found that there is a reasonable probability that Plaintiff can establish that the
Underlying Litigation was terminated in its favor, and finding Defendants’ arguments
insufficient as a matter of law to defeat Plaintiff’s claim of favorable termination, the Court
addresses the additional elements of Plaintiff’s malicious prosecution claim. To sustain its prima
facie burden, Plaintiff must also show a lack of probable cause, malice, and special injury. 21
Perryman v. Village of Saranac Lake, 839 N.Y.S.2d 290, 292 (App. Div. 2007) (“To succeed on
a claim for malicious prosecution, a plaintiff must show that the defendant initiated a proceeding
that terminated in favor of the plaintiff, an entire lack of probable cause in the prior proceeding,
malice and special injury.” (citations and internal quotation marks omitted)). In addition,
because the Underlying Litigation was brought solely by Defendant Microflo, Plaintiff must
show that the other Defendants are liable for malicious prosecution, despite not commencing the
Underlying Litigation.
iii. Probable cause
To sustain a malicious prosecution claim, Plaintiff must also show “an entire lack of
probable cause.” Engel, 93 N.Y.2d at 204. Probable cause is defined as “such facts and
stipulation of dismissal. Because the Court finds that the Underlying Litigation was abandoned
pursuant to the principles addressed above, the Court declines to opine on this issue.
21
Judge Wall did not consider whether Plaintiff had met its prima facie burden with
respect to the remaining elements of its malicious prosecution claim. Because the parties
addressed these remaining elements in their submissions to Judge Wall, the Court reviews all
submissions in deciding this motion.
29
circumstances as would lead a reasonably prudent person in like circumstances to believe
plaintiff guilty.” Perryman, 839 N.Y.S.2d at 292. “Because obviously less in the way of
grounds of belief will be required to justify a reasonable man in bringing a civil rather than a
criminal suit, when the underlying action is civil in nature, the want of probable cause must be
patent.” Butler v. Ratner, 691 N.Y.S.2d 871, 873 (App. Div. 1994) (citations and internal
quotation marks omitted). Thus, if a defendant “had probable cause to assert some of their
causes of action, [a] plaintiff[] [cannot] maintain a malicious prosecution claim.” Perryman, 839
N.Y.S.2d at 292. A presumption of probable cause may exist as a result of a “judicial
determination, whether final or preliminary” which previously reviewed the evidence and found
it sufficient. Rubin, 906 N.Y.S.2d 784 (“A prior judicial recognition of potential merit of the
underlying case creates a presumption that it did not lack probable cause.” (citing Fink v.
Shawangunk Conservancy, Inc., 790 N.Y.S.2d 249 (App. Div. 2005) and Black v. Green
Harbour Homeowners’ Ass’n., Inc., 829 N.Y.S.2d 764 (App Div. 2007))). Moreover,
determining “the propriety of defendants’ conduct [in bringing the Underlying Litigation], is to
be decided by the facts as they appeared to be at the time the prosecution was instituted, not after
the action has been determined.” Levitin v. Miller, No. 92-CV-520, 1994 WL 376078, at *5
(S.D.N.Y. July 15, 1994) (citing Marion Steel Co., v. Alderton Dock Yards, Ltd., 227 N.Y.S. 678
(App. Div. 1928)).
Plaintiff claims that Defendants’ allegations in the Underlying Litigation were made
“without any reasonable basis in fact or any probable cause.” (Compl. ¶ 25.) According to
Plaintiff, with respect to each of the causes of action alleged in the Underlying Litigation, there
was no factual basis and/or Defendants knew or should have known that there was no factual
support for any of their claims. (Id. ¶ 25a–g.) Plaintiff further argues that the underlying conflict
30
between the parties was “simply a breakdown in business negotiations, and nothing more” and
that Malkin “conceded [during his deposition that] he had no basis for filing a lawsuit against”
Plaintiff. (Pl. Supp. Opp. 15.) In support of this argument, Plaintiff submitted excerpts of the
transcript of Malkin’s deposition in which Malkin admits that his allegations were either based
on “speculation” or that he had no actual knowledge or facts. (Id. at 15–18.) Defendants dispute
Plaintiff’s argument with a Declaration from Malkin which Defendants claim “establishes that
[Malkin] and Microflo had a good faith and reasonably based belief that Microflo had been
wronged by Liberty and that the Underlying [Litigation] was pursued in a reasonable attempt to
recover for that wrong and for no other purpose.” (Def. Supp. Reply 17.) This Declaration
reiterates Defendants’ allegations in the Underlying Litigation that Plaintiff’s conduct in the
negotiations regarding the sale of the photo filters amounted to unfair trade practices, fraud and
other wrongful conduct.
The arguments of the parties setting forth their understanding and interpretation of the
meaning of certain statements are disputed issues of fact that cannot be resolved by the Court.
Since the parties agree that these statements are material to a determination of whether
Defendant Microflo had probable cause to commence the Underlying Litigation, this issue must
be decided by the trier of fact. While Plaintiff argues that Defendant Microflo had no basis in
fact to pursue its claims in the Underlying Litigation and the conflict at the heart of the
Underlying Litigation amounted to nothing more than a “potential business deal [which] fell
through for a multitude of reasons,” Defendants argue that they had a basis to assert that
Plaintiff’s conduct in the Underlying Litigation was “not legal” and illicit. Thus, the parties
dispute several issues of fact bearing on the issue of probable cause — whether Defendants
disclosed “trade secrets” in negotiations with Plaintiff, the reason why the negotiations between
31
the parties failed, and whether Microflo had a basis to believe that Plaintiff “reverse-engineered”
its filters in order to produce its own. Construing the evidence in Plaintiff’s favor, as the Court is
required to do, the Court concludes there are disputed issues of fact that preclude a finding that
Plaintiff has failed to allege a lack of probable cause. Tray Wrap, Inc., 2008 WL 222495, at *13
(Only “[w]hen the facts regarding the existence of probable cause and the inferences to be drawn
therefrom are undisputed, [can] the existence of probable cause . . . be decided as a matter of
law.” (citing Parkin v. Cornell Univ., Inc., 78 N.Y.2d 523 (1991) and Lundgren v. Margini, 817
N.Y.S.2d 349 (App. Div. 2006))). 22
iv. Malice
Plaintiff must also show that Microflo acted with malice in commencing the Underlying
Litigation. Plaintiff argues that “[i]t is undisputed that Defendants acted with conscious falsity
when, after little to no investigation, they filed suit based on speculation.” (Pl. Supp. Opp. 18.)
Plaintiff further alleges that “Malkin’s [deposition] testimony supports an inference under . . .
22
Defendants have noted that most of the claims in the Underlying Litigation withstood
two motions to dismiss. A “judicial determination in the prior action such as an adverse
judgment to plaintiff, a conviction of the same, or a recognition of the potential merit of
defendant’s prior action is either prima facie evidence of probable cause to initiate the prior
proceeding or conclusive evidence of the same.” Tray Wrap, Inc. v. Pacific Tomato Growers
Ltd., 856 N.Y.S.2d 503, 2008 WL 222495, at *13 (Sup Ct. Bronx Cnty. Jan. 25, 2008);
Hornstein v. Wolf, 491 N.Y.S. 2d 183, 186 (App. Div. 1985); see also I.G. Second Generation
Partners, L.P. v. Duane Reade, 793 N.Y.S.2d 379, 380–81 (App. Div. 2005) (“Where, as here, a
judgment has been entered against the malicious prosecution plaintiff in the prior action of which
it complains, the circumstance is at least prima facie evidence that the prior action was based on
probable cause, and this presumption is not overcome by a subsequent reversal”). While the
Underlying Litigation withstood a motion to dismiss by Plaintiff, that motion sought to dismiss
solely on jurisdictional and/or venue grounds. The Walgreen Defendants moved to dismiss the
Underlying Litigation for failure to state a claim, which motion was granted in part, and denied
in part by Judge Wexler. However, Judge Wexler did not issue a written opinion and there is no
evidence before the Court that he considered the sufficiency of the substantive allegations
against Plaintiff in addressing the motion to dismiss by the Walgreen Defendants.
32
New York law, because there are no facts supporting probable cause to pursue Liberty in the
Underlying Litigation.” (Id.)
Malice “may be shown by proving that the prosecution complained of was undertaken
from improper or wrongful motives, or in reckless disregard of the rights of the plaintiff.” Daly
v. Ragona, No. 11-CV-3836, 2013 WL 3428185, at *7 (E.D.N.Y. July 9, 2013) (citing Pinsky v.
Duncan, 79 F.3d 306, 313 (2d Cir. 1996)). “A lack of probable cause generally creates an
inference of malice.” Id. Moreover, once there is an issue of fact as to probable cause, “the
element of malice also becomes an issue of material fact as well.” Boyd v. City of New York, 336
F.3d 72, 77 (2d Cir. 2003); Zahrey v. City of New York, No. 98-CV-4546, 2009 WL 54495, at
*20 (S.D.N.Y. Jan. 7, 2009). Because the Court finds that there is an issue of fact on the issue of
probable cause, there is also an issue of fact as to the issue of malice.
v. Special injury
Plaintiff argues that it sustained the following “special damages” as a result of the
Underlying Litigation: significant legal fees which affected Plaintiff’s ability to purchase a
competitor and to borrow capital, strained relationships with distributors and customers, loss or
projected sales revenues, and “decreased availability of funds and higher borrowing costs.” (Pl.
Supp. Opp. 18; Am. Compl. ¶ 28.) Plaintiff also claims that it disclosed the Underlying
Litigation during discussions with potential buyers and while it held discussions with one
specific company, those discussions “ceased in large part due to” the Underlying Litigation.
(Am. Compl. ¶ 28.) Defendants assert that even if proven, Plaintiff’s special injury allegations
are insufficient, because the allegations either lack proof or do not satisfy the “special injury”
standard under New York law of being “more cumbersome than the . . . demands of defending a
lawsuit.” (Def. Supp. Mot. 12–16.)
33
A special injury is a “highly substantial and identifiable interference with person,
property or business and must entail some concrete harm that is considerably more cumbersome
than the physical, psychological or financial demands of defending a lawsuit.” Dudick v. Gulyas,
716 N.Y.S.2d 407, 410 (App. Div. 2000); Engel, 93 N.Y.2d at 205 (“[W]hat is special about
special injury is that the defendant must abide some concrete harm that is considerably more
cumbersome than the physical, psychological or financial demands of defending a lawsuit.”).
Courts have recognized special injuries in the form of arrests, loss of business, suspension
without pay, and provisional remedies such as an attachment of bank accounts or an injunction.
Minasian v. Lubow, 856 N.Y.S.2d 255, 257 (App. Div. 2008) (arrest); Dudick, 716 N.Y.S.2d at
410 (loss of business); Honzawa v. Honzawa, 701 N.Y.S.2d 411, 413 (App. Div. 2000)
(attachment); Groat v. Town Bd. of Town of Glenville, 426 N.Y.S.2d 339, 341(App. Div. 1980)
(suspension without pay). In order for a claim of lost business to meet the special injury
standard, it must be specific and verifiable. See Engel, 182 F.3d at 132 (noting that “[e]ven
though we can foresee specific, verifiable loss of business providing the necessary grievance [for
special injury], the loss of one client along with vague allegations of reputational loss, given [the
plaintiff’s] established practice, are not sufficient”); Korova Milk Bar of White Plains, Inc. v.
PRE Properties, LLC, No. 11-CV-3327, 2013 WL 417406, at *14 (S.D.N.Y. Feb. 4, 2013)
(“New York law recognizes loss of business as a special injury in a case for malicious
prosecution, as long as [the] [p]laintiff sufficiently identifies the specific business lost as a result
of the civil proceeding.”).
1. Legal fees
Plaintiff claims that the significant cost of legal fees in defending the Underlying
Litigation, “brought [Plaintiff’s] negotiations to purchase a competitor to a halt due to [Liberty’s]
34
inability to borrow capital as a result of a covenant breach during the first quarter of 2009.” (Pl.
Supp. Opp. 18.) This claim is insufficient to allege a special injury. “[A]ttorneys’ fees and cost
associated with defending a lawsuit do not rise to the level necessary to show special damages.”
McCaul v. Ardsley Union Free School Dist., 514 F. App’x 1, 6 (2d Cir. 2013) (claim that
plaintiff “spent thousands of dollars to retain an attorney and suffered distress and anxiety” is not
special injury (citing Engel, 93 N.Y.2d at 205)); Sankin v. Abeshouse, 545 F. Supp. 2d 324, 328
(S.D.N.Y. 2008) (“[A]ttorneys’ fees and cost associated with defending a lawsuit do not rise to
the level necessary to show special damages.” (citing Engel, 93 N.Y.2d at 205)); Engel, 93
N.Y.2d at 205 (noting that special injury must involve harm “more cumbersome” than “financial
demands of defending a lawsuit”); Mobile Training, 28 Misc. 3d 1226A, 958 N.Y.S.2d 61
(“[T]he expense of defending against the [underlying] lawsuit . . . is decidedly not special.”);
Zhang v. Goff, 18 Misc. 3d 1134(A), at *3 (Sup. Ct. Queens Cnty. 2008) (“[L]egal fees do not
meet ‘the special injury requirement.’” (citing Engel, 93 N.Y.2d at 201)). Thus, to the extent that
Plaintiff is alleging that its inability to borrow capital and its negotiations to purchase a
competitor were halted by the “significant cost of legal fees,” Plaintiff has not pled a harm “more
cumbersome” than the “demands of defending a lawsuit.” Engel 93 N.Y.2d at 205. The Court
considers Plaintiff’s allegation that it lost its ability to borrow capital and to purchase a
competitor separately.
2. Inability to borrow capital and negotiations to purchase
competitor
Plaintiff’s claim that negotiations to purchase a competitor ceased due to its “inability to
borrow capital as a result of a covenant breach during the first quarter of 2009,” (Pl. Supp. Opp.
18), also fails to satisfy the special injury element. Plaintiff has not specified how the
Underlying Litigation caused the unspecified covenant breach which then caused Plaintiff to be
35
unable to borrow capital. To meet the special injury requirement, the injury must have “resulted
because of the [Underlying Litigation].” Goodstein v. Jones, No. 114335/2006, 2008 N.Y. Misc.
LEXIS 10574, at *2–3, 2008 N.Y. Slip Op 33018U (Sup. Ct. N.Y. Cnty. Nov. 10, 2008).
Accordingly, this allegation does not meet the special injury standard.
3. Strained relationships with distributors and customers
Plaintiff claims that “Microflo’s pursuit of baseless claims caused strained relationships
the [sic] Liberty’s distributors and customers and caused Liberty to receive requests for
reimbursements of legal fees for costs associated with subpoenaed information in the
[Underlying Litigation].” (Am. Compl. ¶ 28.) First, the “requests for reimbursements” constitute
costs related to the defense of the Underlying Litigation, and as explained above, cannot meet the
special injury standard. Moreover, Plaintiff’s vague claim of “strained relationships,” as a result
of the Underlying Litigation is also insufficient to state a special injury. The limited case law
that addresses whether a claim of “strained relationships” can satisfy the special injury
requirement suggests that such a claim is insufficient. See Engel, 93 N.Y.2d at 207 (finding that
“the loss of one client along with vague allegations of reputational loss . . . are not sufficient” to
meet special injury requirement); Campion Funeral Home, Inc. v. State of New York, 569
N.Y.S.2d 518, 521 (App. Div. 1991) (“Injury to reputation . . . fails to satisfy [special injury]
requirement.”); Rubin, 906 N.Y.S.2d 783 (Sup. Ct. N.Y. Cnty. 2009) (“conclusory claim of
reputational harm” insufficient to state special injury); Loftus v. Arthur, 847 N.Y.S.2d 902 (Sup.
Ct. Madison Cnty. 2007) (noting that “incidental damage to [a] plaintiff’s reputation is
insufficient” to state a special injury). Thus, Plaintiff’s allegation of “strained relationships” as a
result of the Underlying Litigation also fails to meet the special injury standard.
4. Loss of projected sales revenue
36
Plaintiff claims that it sustained “substantial loss of projected sales revenues” in the
amount of $745,097 “as a direct result of Microflo’s conduct.” (Pl. Supp. Opp. 19.) Plaintiff
specifies that its net projected lost sales was $486,662 to Walmart, $53,561 to Costco, $26,781 to
Independent photo labs, and $382,368 to Noritsu Labs at Walgreens. (Id.) Plaintiff elaborates
that with regard to projected lost sales to Noritsu Labs, it was “unable to provide reusable filters
which could be manufactured to the specifications necessary for use . . . upon disclosure of the
[Underlying Litigation].” (Id.)
In order to meet the special injury element, a lost business claim must be specific and
verifiable. While Plaintiff provides specific figures for its alleged losses, with respect to its lost
sales from Walmart, Costco, and Independent photo labs, Plaintiff has not provided any facts
explaining how these losses were caused by the Underlying Litigation, merely alleging that these
losses were “a direct result of [Defendant] Microflo’s conduct.” Plaintiff must allege “facts that
would establish that” the Underlying Litigation caused its claimed special injury. Kaye v.
Trump, 873 N.Y.S.2d 5, 6 (App. Div. 2009) (rejecting plaintiff’s claim of special injury where
plaintiff alleged that “she was forced by defendants’ ‘acts’ to sell her condominium unit and
move from the building [but] assert[ed] no facts that would establish that the [underlying
litigation] caused her to move”); see also Kaslof v. Global Health Alternatives, Inc., No. 98-CV7477, 2000 U.S. Dist. LEXIS. 21053, at *68 (E.D.N.Y. June 29, 2000) (noting that “plaintiff
failed to allege any special injury that they have incurred as a result of the [underlying
litigation]”). With respect to the losses from Walmart, Costco and Independent photo labs,
Plaintiff has not provided any specific allegations as to how these losses were caused by the
Underlying Litigation; therefore, these losses do not constitute special injury.
37
With respect to its loss from sales to Nortisu Labs, Plaintiff states that it was “unable to
provide reusable filters which could be manufactured to the specifications necessary for use in
Noritsu photo developing machines upon disclosure of the [Underlying Litigation].” (Pl. Supp.
Opp. 19.) Although lacking in details, because Plaintiff alleges what the lost business is, and that
the lost business is as a result of the Underlying Litigation, it arguably satisfies the special injury
standard under New York law. See In re Eerie World Entm’t., LLC, No. 00-CV-13708, 2006
WL 1288578, at *8 (S.D.N.Y. Bankr. Apr. 28, 2006) (plaintiff alleged special injury when
plaintiff pled loss of business from a specific entity that was the result of initiation and
prosecution of the prior action); Strumpf v. Asdourian, No. 110141/06, 2006 N.Y. Misc. LEXIS
3976, at *10 (Sup. Ct. N.Y. Cnty. Dec. 12, 2006) (finding that plaintiff sufficiently alleged
special injury by claiming “the loss of certain clients whom she was compelled to advise
regarding the [prior] [law]suit”). 23
In sum, crediting Plaintiff’s factual allegations, Plaintiff has shown a reasonable
probability of succeeding on its malicious prosecution claim against Defendant Microflo and
Defendants have not defeated Plaintiff’s claim as a matter of law.
23
Plaintiff also argues that its efforts to sell the company were “impaired” because of the
Underlying Litigation. (Pl. Supp. Opp. 20.) Plaintiff alleges that it was required to disclose the
Underlying Litigation, “as well as the legal fees incurred and anticipated” to potential buyers and
this “negatively affected” its sale efforts. (Id.) However, Plaintiff does not specify in its
opposition papers the nature of the negative impact on its sale efforts caused by the Underlying
Litigation. The Complaint provides a more specific allegation stating that, “one specific
company held discussions with [Plaintiff] about a potential sale and discussions ceased in large
part due to [Defendant] Microflo’s lawsuit.” (Am. Compl. ¶ 28,) In both of these allegations,
Plaintiff does not appear to be alleging that it lost a sale because of the Underlying Litigation but
that its sale efforts were negatively impacted somehow by the Underlying Litigation. Without
specific allegations demonstrating that this negative impact constituted “a highly substantial and
identifiable interference with [Plaintiff’s] person, property or business . . . more cumbersome
than the physical, psychological or financial demands of defending a lawsuit,” these allegations
are insufficient to state a special injury.
38
e. Veil piercing
To state a claim for malicious prosecution, Plaintiff must show that Defendants
commenced the Underlying Litigation. Sankin v. Abeshouse, 545 F. Supp. 2d 324, 327
(S.D.N.Y. 2008) (plaintiff failed to state malicious prosecution claim where plaintiff did not
show that underlying litigation “was initiated by either [d]efendant”); Loftus v. Arthur, 847
N.Y.S.2d 902 (Sup Ct. 2007) (“It has been held that the key to the first element of [a malicious
prosecution claim] is the defendant’s commencement the underlying proceeding.”). It is
undisputed that the Underlying Litigation against Plaintiff was commenced by Defendant
Microflo only. Thus, Plaintiff must allege a basis for liability against Defendants Ecotech,
Malkin, and the unknown Defendants, Does 1–20. Plaintiff alleges that Malkin and Ecotech are
“alter egos” of Defendant Microflo, and the Court should therefore “pierce the corporate veil”
and hold them liable for malicious prosecution of the Underlying Litigation. 24 (Pl. Supp Opp.
21–24.)
“Alter ego liability exists when a parent or owner uses the corporate form to achieve
fraud, or when the corporation has been so dominated by an individual or another corporation
(usually a parent corporation), and its separate identity so disregarded, that it primarily transacted
the dominator’s business rather than its own.” OOO “Garant-S” v. Empire United Lines Co.,
Inc., 557 F. App’x 40, 45 (2d Cir. 2014) (quoting Kiobel v. Royal Dutch Petroleum Co., 621 F.
3d 111, 195 (2d Cir. 2010)). A party seeking to pierce the corporate veil under New York law
24
Though not addressed in their briefs before the Court, in its Amended Complaint,
Plaintiff appears to allege liability against Ecotech as an agent of Defendant Microflo in its
Amended Complaint . (Am. Compl. ¶ 4 (“Ecotech has maintained through Microflo a
maliciously prosecuted lawsuit against Liberty, for its own benefit. Microflo uses Ecotech as its
agent for causing the manufacture of Microflo’s product in Mexico, and uses Ecotech and others
as agents to direct the sale of its products to the customers of Microflo. Ecotech, through
Microflo, prosecuted the now dismissed case against Liberty.”); see also id. ¶ 5 (Malkin . . . .
utilize[s] [Microflo and Ecotech] as his individual agents.).
39
and hold another entity or individual liable on a claim against a corporation must show: (1) the
alleged alter ego “exercised complete domination over the corporation with respect to the
transaction at issue; and (2) such domination was used to commit a fraud or wrong that injured
the party seeking to pierce the corporate veil.” MAG Portfolio Consultant, GMBH v. Merlin
Biomet Grp., LLC, 268 F.3d 58, 63 (2d Cir. 2001) (quoting Am Fuel Corp. v. Utah Energy Dev.
Co., 122 F.3d 130, 134 (2d Cir. 1997)). Courts consider ten equitable factors in determining
whether the first requirement — domination — has been met. They are:
(1) the absence of the formalities and paraphernalia that are part
and parcel of the corporate existence, i.e., issuance of stock,
election of directors, keeping of corporate records and the like,
(2) inadequate capitalization, (3) whether funds are put in and
taken out of the corporation for personal rather than corporate
purposes, (4) overlap in ownership, officers, directors, and
personnel, (5) common office space, address and telephone
numbers of corporate entities, (6) the amount of business discretion
displayed by the allegedly dominated corporation, (7) whether the
related corporations deal with the dominated corporation at arms
length, (8) whether the corporations are treated as independent
profit centers, (9) the payment or guarantee of debts of the
dominated corporation by other corporations in the group, and
(10) whether the corporation in question had property that was
used by other of the corporations as if it were its own.
JSC Foreign Econ. Ass’n Technostroyexport v. Int’l Dev. & Trade Servs., Inc., 386 F. Supp. 2d
461, 464 65 (S.D.N.Y. 2005) (quoting Wm. Passalacqua Builders, Inc. v. Resnick, 933 F.2d 131,
139 (2d. Cir. 1991)). If the domination requirement is met, the plaintiff must then fulfill the
second requirement by showing (1) “the existence of a wrongful or unjust act toward that party,”
and (2) that “the act caused the party’s harm.” JSC Foreign Econ. Ass’n Technostroyexport,
386 F. Supp. 2d at 465. “The party seeking to pierce the corporate veil must establish that the
owners of the corporation, through their dominance of the corporation, ‘abused the privilege of
doing business in the corporate form to perpetrate a wrong or injustice against that party such
40
that a court in equity will intervene.’” Id. (quoting Morris v. N.Y. Dep’t of Taxation and Fin., 82
N.Y.2d 135, 141 (1993)); see also Mag Portfolio Consultant, GMBH v. Merlin Biomed Group
LLC, 268 F.3d 58, 64 (2d Cir. 2001) (“Without a finding that the domination occurred for the
purpose of committing a wrong, the second element of a veil-piercing analysis has not been
met.”). The Court considers each Defendant below.
i. Ecotech
Defendants contend that Plaintiff cannot establish a reasonable probability of success
against Ecotech, because there is “no law” under which a “subsidiary or dominated party” has
been held liable for the acts of its parent, controlling shareholder, or dominating party based on
an alter ego theory. (Def. Supp. Reply 18; Def. Supp 23.) Defendants are incorrect. Although
uncommon, New York law recognizes “reverse veil-piercing,” where, as here, a party seeks to
hold a subsidiary liable for the actions of its parent or shareholders. Ross Univ. School of
Medicine, Ltd. v. Brooklyn-Queens Health Care, Inc., No. 09-CV-1410, 2013 WL 1334271,
at *13 n.3 (E.D.N.Y. Mar. 28, 2013) (“[T]he doctrine of ‘reverse’ veil-piercing is applicable
where . . . a party attempts to hold a subsidiary corporation . . . liable for the actions of its
parent.”); Miramax Film Corp. v. Abraham, No. 01-CV-5202, 2003 WL 22832384, at *7
(S.D.N.Y. 2003) (“Although reverse veil piercing is rare, it may be appropriate in cases where
the alter ego is being used as a ‘screen’ for the dominating entity.” (citing Kingston Dry Dock
Co. v. Lake Champlain Transp. Co., 31 F.2d 265, 267 (2d Cir. 1929))); Securities Investor
Protection Corp. v. Stratton Oakmont, Inc., 234 B.R. 293, 323 (Bankr. S.D.N.Y. 1999) (noting
that “reverse veil piercing may be rare . . . but not impossible”); see also Am Fuel Corp. v. Utah
Energy Dev. Co., Inc., 122 F.3d 130, 134 (2d. Cir. 1997) (“New York law recognizes ‘reverse’
41
piercing . . . seek[ing] to hold a corporation accountable for actions of its shareholders.” (citing
State v. Easton, 647 N.Y.S.2d 904, 908–09 (Sup. Ct. 1995)).
“As with conventional veil-piercing claims, in a reverse veil-piercing claim, the plaintiff
must allege (1) that the owner exercised complete domination over the corporation with respect
to the transaction at issue; and (2) that such domination was used to commit a fraud or wrong
that injured the party seeking to pierce the veil.” JSC Foreign Economic Ass’n
Technostroyexport, 295 F. Supp. 2d. at 379. Courts consider the same ten equitable factors
outlined above in determining whether there is sufficient evidence of domination in a reverse
veil-piercing claim, as in a typical veil-piercing claim. Monteleone v. Leverage Grp., No. 08CV-1986, 2009 WL 249801, at *3 (E.D.N.Y. Jan. 28, 2009).
In its Amended Complaint, Plaintiff makes several allegations in support of its alter ego
theory, including that:
a) Ecotech functions at the absolute direction of Microflo in
conducting their business of causing to be manufactured filters for
photo developing machines[,] b) All of the business of Microflo
and Ecotech is directed by Malkin from his office in New York[,]
c) Prices for goods by Ecotech and Microflo are all determined by
Malkin from his office in New York[,] d) The formalities of annual
and periodic reports and statements required of Microflo, and
Ecotech are conducted on an after the fact basis by Malkin, if at
all[,] e) The existence of Ecotech is maintained by Malkin and
Microflo only to place profits . . . in offshore tax havens, such
existence and activities being without economic substance but
constituting the business of Microflo[,] f) Microflo functions as
the alter-ego of Malkin in that Microflo is used as a corporate
pocketbook for Malkin and his individual interest[,] and g) The
capitalization of Microflo and Ecotech is established at the sole
direction and whim of Malkin.
(Am. Compl. ¶ 6a–g.) Plaintiff claims that Ecotech does not observe corporate formalities, as
evidenced by Malkin’s “conce[ssion]” that, when assigning his 100% interest in Ecotech to
Microflo, he did not require “any additional stock in Microflo Ltd. be issued to [him] in
42
exchange.” (Pl. Supp. Opp. 22–23.) Plaintiff also alleges that the entities were inadequately
capitalized and that Malkin “did not (and could not) make timely payments [owed from Ecotech
to Microflo] because Malkin failed to issue instructions among his various entities to generate
invoices.” (Id. at 23.) Plaintiff also contends that Malkin admitted in documents exchanged in
litigation that he used corporate funds for personal expenses. 25 (Id. at 23.)
These allegations — alleging a lack of corporate formalities, undercapitalization, failure
to issue periodic reports, and the use of corporate funds for personal use — are sufficient, if
accepted as true, to establish domination. United States v. Hued, No. 87-CV-7740, 1992 WL
346877, at *3 (S.D.N.Y. Nov. 10, 1992) (finding a triable issue of fact on alter ego claim where
plaintiff alleged that corporate entity was undercapitalized and alleged alter ego could not recall
whether corporation had ever issued an annual report); Horizon Inc. v. Wolkowicki, 865
N.Y.S.2d 195 (App. Div. 2008) (finding triable issue of fact precluding summary judgment
where alleged alter ego “ignored the corporate form by transferring monies in and out . . .
without any documentation or formalities); Forum Ins. Co. v. Texarkoma Transp. Co., 645
N.Y.S.2d 786, 786 (App. Div. 1996) (“Under New York law, the corporate veil can be pierced
where there has been, inter alia, a failure to adhere to corporate formalities, inadequate
capitalization, use of corporate funds for personal purpose, [and] overlap in ownership and
directorship . . . .”).
Having shown evidence of domination, Plaintiff must also show that Microflo’s
“domination was used to commit a fraud or wrong against [P]laintiff which resulted in [its]
25
Plaintiff submitted an email authored by Malkin dated July 23, 2005, stating in
relevant part, “As you may already know, I screw up the cash flow for all of the companies
because I hold the funds in a New York bank where I get an unusual rate of interest; enough to
by [sic] me a car and much more and then everything gets paid in December.” (Email dated July
23, 2005, annexed to the Declaration Harold J. Ducote In Opposition to Def. Mot. to Strike as
Exh. O, Tab 10.)
43
injury.” JSC Foreign Econ. Ass’n Technostroyexport, 295 F. Supp. 2d at 378. This prong does
not require evidence of fraud, rather “a veil-piercing claimant can prevail without proving fraud
if the claimant can identify some non-fraudulent ‘wrong’ attributable to the defendant’s complete
domination of a subsidiary entity.” Rolls-Royce Motor Cars, Inc. v. Schudroff, 929 F. Sup. 117,
122 (S.D.N.Y. 1996). Plaintiff alleges that “Ecotech, through Microflo, prosecuted” the
Underlying Litigation; Plaintiff appears to allege malicious prosecution as the “dishonest” or
“wrong” act by Ecotech. (Am. Compl. ¶ 4.) This satisfies the second requirement for veilpiercing. Cardell Fin. Corp. v. Suchodolski Assocs., No. 09-CV-6148, 2012 U.S. DIST. LEXIS
188295, at *90 (S.D.N.Y. July 17, 2012) (“[T]he use of the corporation to file a lawsuit that is
alleged to be having a detrimental impact . . . could be viewed as a wrongful act.”). Accordingly,
Plaintiff has sufficiently alleged an alter ego relationship between Microflo and Ecotech.
ii. Malkin
Plaintiff argues that Malkin should be held liable for Microflo’s malicious prosecution of
the Underlying Litigation, based on similar allegations as those against Ecotech. Plaintiff
contends that Malkin “is the sole shareholder, director, officer, and full-time employee of
Microflo,” that Microflo is undercapitalized and that Malkin used Microflo’s corporate funds for
his personal use. (Pl. Supp. 22–23.) Plaintiff also alleges that all of Microflo’s business is
directed by Malkin, and that Microflo is used as the “corporate pocket book for Malkin and his
individual interests.” (Am. Compl. ¶¶ 6b, 6f.) Defendants argue that Plaintiff’s allegations are
insufficient to show an alter ego relationship between Malkin and Microflo, relying on corporate
records to demonstrate that Microflo “acted in its own name from 2003 through 2008.” (Def.
Supp. Reply 19.) Defendants also assert that Plaintiff has failed to submit any proof
demonstrating inadequate capitalization, use of corporate funds for personal purposes, and fails
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to demonstrate a “factual basis” for its alter ego theory or the presence of any other factor
typically used by courts in assessing “complete domination” by alleged alter egos. (Id. at 19–
23.)
Plaintiff is not required to prove its claims in order to defeat Defendants’ motion to strike.
Burrill, 158 Cal. Rptr. 3d at 347–48 (“[T]he anti-SLAPP statute does not require the plaintiff to
prove the specified claim to the trial court.” (citation and internal quotation marks omitted)).
Rather, the Court is required to credit Plaintiff’s factual allegations. (Id. (Courts should “accept
as true all evidence favorable to the plaintiff.”)). Crediting Plaintiff’s allegations, there appears
to be at least a triable issue of fact as to the issue of domination of Microflo by Malkin,
particularly as Plaintiff alleges a use of corporate funds for personal use. The improper use of
funds is sufficient to support an alter ego claim. See Dolco Inv., Ltd. v. Moonriver Dev., Ltd.,
526 F. Supp. 2d 451, 454–455 (S.D.N.Y. 2007) (citing Wajilam Exps. (Singapore) Pte. Ltd. v.
ATL Shipping Ltd., 475 F. Supp. 2d 275, 283 (S.D.N.Y. 2006) and Strojmaterialintorg v. Russian
Am. Commercial Corp., 815 F. Supp. 103, 105 (E.D.N.Y. 2003)).
Plaintiff also satisfies the second veil-piercing prong which considers whether the alter
ego used its domination to commit fraud or another wrong — that is, “to perpetrate the violation
of a . . . positive legal duty or a dishonest or unjust act in contravention of plaintiff’s legal
rights.” D. Klein & Son, Inc. v. Good Decision, Inc., 147 F. App’x 195, 198 (2d Cir. 2005).
Plaintiff alleges that Malkin “acting through Microflo,” caused the Underlying Litigation against
Liberty “for his own benefit.” (Am. Compl. ¶ 16.) As discussed above, the malicious
prosecution of the Underlying Litigation meets this standard. Thus, Plaintiff has alleged
sufficient facts, which if accepted as true as the Court is required to do, establish that Malkin was
the alter ego of Microflo.
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iii. John/Jane Does 1–20
Plaintiff has not addressed the liability of the unknown Defendants (“Doe Defendants”)
in any of its briefing submitted in connection with the instant motion. In the Amended
Complaint, Plaintiff states that it believes that “Does 1 through 20 were responsible in some
manner for the acts and transactions hereby alleged and are liable to Plaintiff.” (Am. Compl.
¶ 8.) Plaintiff does not proffer any alter ego allegations against the Doe Defendants, though
Plaintiff alleges vaguely that “each of the Defendants was the agent, employee, licensee, invitee,
assignee and/or subordinate of the remaining Defendants.” (Id. ¶ 9.) Because Plaintiff has not
sufficiently alleged a basis for liability against the Doe Defendants, the Court grants Defendants’
anti-SLAPP motion as to the Doe Defendants.
f. Sanctions
In view of the Court’s decision denying Defendants’ motion to strike, the Court denies
Defendants’ motion for sanctions.
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III.
Conclusion
For the reasons set forth above, the Court adopts Judge Wall’s R&R as to the
determination that the issue of which substantive law applies to Plaintiff’s malicious prosecution
claim is the law of the case, but declines to adopt the portion of Judge Wall’s R&R which found
that Plaintiff does not have a reasonable probability of prevailing on its malicious prosecution
claim. The Court finds that Plaintiff has a reasonable probability of prevailing on its malicious
prosecution claim as to the named Defendants. Therefore, California’s anti-SLAPP statute does
not preclude Plaintiff’s claim against the named Defendants. Accordingly, the Court denies
Defendants’ motion to strike the Complaint as to the named Defendants. The Court grants
Defendants’ motion to strike the Complaint as to Does 1 through 20. The Court also denies
Defendants’ motion for sanctions.
SO ORDERED:
s/ MKB
MARGO K. BRODIE
United States District Judge
Dated: Brooklyn, New York
September 25, 2014
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