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Liberty Synergistics, Inc v. Microflo Ltd.

October 19, 2011


The opinion of the court was delivered by: E. Thomas Boyle United States Magistrate Judge


Defendants Microflo Ltd. ("Microflo"), Edward Malkin, and Ecotech Limited ("Ecotech"), filed this Special Motion to Strike Complaint ("Motion to Strike") under California Code of Civil Procedure § 425.16, seeking to strike plaintiff's complaint alleging malicious prosecution and dismiss this action as a strategic lawsuit against public participation ("SLAPP").*fn1 See Cal. Code Civ. Proc. § 425.16 (the "anti-SLAPP statute"). Defendants further requests sanctions against plaintiff, Liberty Synergistics, Inc. ("Liberty"), in the amount of defendants' attorneys' fees and costs. Liberty filed a Memorandum of Law in Opposition to Defendants' Motion ("Opposition" or "Opp."), arguing that the Court should deny defendants' Motion to Strike or, in the alternative, allow plaintiff to engage in limited discovery to enable it to defend against the Motion on its merits. (See Opp. at 22).

For the following reasons, I recommend that defendants' Motion to Strike be DENIED.


The procedural and factual history of this case is complicated. In this action, plaintiff alleges that defendants maliciously prosecuted an earlier civil action in this district against plaintiff (the "Underlying Action"). That earlier action arose out of negotiations over an incipient agreement among Microflo, Walgreen Co. ("Walgreen"), and Liberty, which was never consummated. (See Motion to Strike at 2-7). The details of these negotiations and of the ensuing lawsuit are relevant to the instant Motion to Strike.

Microflo is a New York corporation that produces and sells re-usable or non-disposable filters used in processing photographs in one-hour photo labs. (Declaration of Edward Malkin in Support of Defendants' Motion ("Malkin Decl.") ¶¶ 1, 3). In early 2004, Malkin, Microflo's president and sole shareholder, contacted Walgreen to solicit a purchase of Microflo's filters for use in Walgreen's one-hour photo labs. (Id. ¶¶ 1, 4). At a meeting at Walgreen's Illinois offices in April 2004, Walgreen employee Michael Tumis asked Microflo to provide samples of its filters so that Walgreen could test them. (Id. ¶ 5). Microflo did so, and Tumis thereafter informed Microflo that the filters were acceptable. (Id. ¶ 6). Tumis also asserted that it would purchase the filters, but that the purchase would have to be made through Liberty. (Id.). Tumis later informed Malkin that Walgreen had provided Liberty with the sample filters Microflo had given to Walgreen for testing. (Id. ¶ 8).

On or about August 27, 2004, Malkin met with Liberty at Liberty's California headquarters. (Id. ¶ 9). At the meeting, the parties discussed "the logistics of Liberty's purchase of the Microflo Filters, the roll-out of the Filters to Walgreen, and other topics related to the sale." (Id.). In addition, Liberty asked "questions related to product development, such as how the Filters were made, what they were made of, what each component part of the Filters was made of, how many cavities were in the mold that was used to make the Filters, where the Filters were made, and why the Filters were made in Mexico." (Id.). Liberty also advised Microflo that it wanted to be paid 33% of the gross receipts from Microflo's sales to Walgreen. (Id. ¶ 10).

Microflo felt that Liberty's financial terms were onerous, and informed Walgreen in September 2004 that it was no longer interested in providing filters to Walgreen through Liberty. (Id. ¶ 11). Tumis and another Walgreen employee later informed Malkin that Walgreen was willing to buy filters directly from Microflo. (Id. ¶ 13). In December 2004, Liberty told Microflo that it would negotiate a lower margin on the sale of filters to Walgreen through Liberty, and sent Microflo a pricing proposal. (Id. ¶ 14). Throughout January 2005, Liberty and Microflo communicated regarding the sale. (Id. ¶ 15). Malkin also continued communicating with Tumis to plan for the preparation and manufacture of the filters for Walgreen. (Id. ¶ 16). On February 17, 2005, Liberty contacted Microflo and stated that it had been unable to conclude an agreement with Walgreen to supply Microflo filters to Walgreen, and would therefore not be entering into an agreement to purchase filters from Microflo. (Id.). Microflo contacted Walgreen and offered to provide filters directly to Walgreen. (Id. ¶ 17). Walgreen responded that it had not decided on a vendor for the filters. (Id.). Malkin learned in May 2006 that Liberty had approached Microflo's customer Wal-Mart, proposing to sell it filters for their one-hour photo processing labs. (Id. ¶ 18). Consequently, Microflo lowered its prices to Wal-Mart and Costco. (Id. ¶ 19).

Microflo then filed the Underlying Action in New York state court against Liberty and a number of Liberty's employees (the "Liberty Defendants"), and Walgreen and Tumis (the "Walgreen Defendants"). (Id. ¶ 20). The state court complaint alleged causes of action for fraud, unfair trade practices, unjust enrichment, breach of contract and of the duty of good faith and fair dealing, and tortious interference with prospective economic advantage, as well as a civil RICO claim. (See Notice of Removal, Exh. 1 at 20-29). On September 24, 2008, the Liberty Defendants removed the case to the U.S. District Court for the Eastern District of New York on the basis of diversity. (Malkin Decl. ¶ 21).

The parties engaged in jurisdictional, but not substantive, discovery. (Id. ¶ 26). In January 2010, the Liberty Defendants proposed a settlement, which Malkin advised counsel not to accept. (Id. ¶¶ 23-24). On May 11, 2010, the court granted in part the Walgreen Defendants' motion to dismiss, dismissing the civil RICO claim with prejudice. (See Declaration of Harold A. Ducote, Jr. In Support of Liberty's Opposition ("Ducote Decl."), Exh. B at 14). The Liberty Defendants' motion to dismiss was denied. (Id.). On July 1, 2010, the district court dismissed the action with prejudice pursuant to a stipulation of dismissal under Federal Rule of Civil Procedure 41(a)(1)(A)(ii). (Declaration of Dennis H. Sabourin, Esq. in Support of Notice of Special Motion to Strike Complaint ("Sabourin Decl."), Exh. D). The stipulation provided that each party would bear its own costs. (Id.).

Liberty filed the instant action in California state court on September 17, 2010. (See Notice of Removal, Exh. A). The Complaint alleges that Microflo and Ecotech are alter egos of Malkin, and that the three defendants prosecuted the Underlying Action without a "reasonable basis in fact or any probable cause." (Id., Exh. A at 2, 5). Liberty asserts that it "sustained in excess of $495,000 in damages in legal fees and other costs" as a result of the filing and prosecution of the Underlying Action. (Id., Exh. A at 7). Defendants removed the action to the Central District of California on the basis of diversity, noting that plaintiff Liberty is a citizen of California, while defendant Malkin is a citizen of New York, defendant Microflo is a citizen of New York and not a citizen of California, and defendant Ecotech is a company organized under the laws of the Cayman Islands and has its principal place of business in a state other than California. (Notice of Removal at 2-3). On January 3, 2011, defendants filed a motion to strike pursuant to California Code of Civil Procedure § 425.16, which allows a party to bring a special motion to strike a complaint if the cause of action reflected in the complaint arises "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 public issues." Cal. Code Civ. Proc. § 425.16. Defendant simultaneously filed a motion to dismiss for lack of personal jurisdiction which also asked, in the alternative, for venue to be transferred to the U.S. District Court for the Eastern District of New York. (See Motion Pursuant to F.R.C.P. 12(b)(2) and 12(b)(3) to Dismiss Complaint for Lack of Personal Jurisdiction ("Motion to Dismiss") at 13-17 (Jan. 3, 2011), ECF No. 12). Before the court ruled on those motions, the parties stipulated to a transfer of the case to the U.S. District Court for the Eastern District of New York pursuant to 28 U.S.C. § 1404(a). See Stipulation to Transfer Entire Case to the U.S. District Court for the Eastern District of New York Pursuant to 28 USC 1404(a) ("Stipulation to Transfer") (Jan. 19, 2011), ECF No. 15. Defendants then filed the instant Motion to Strike, which was referred to the undersigned on September 14, 2011. See Order Referring Motion (Sept. 14, 2011). The Court heard oral argument on October 6, 2011.


This case presents a classic choice-of-law question because a tort was allegedly committed by a New York citizen in New York, which had its alleged effect on a California entity in California. The parties disagree about whether the law of California or of New York applies to this action. So, before this Motion to Strike can be decided on its merits, the Court must decide which state's law applies. This inquiry is complicated, in part, because the case was originally filed in California and then transferred to New York. The rule in such situations seems straightforward:

Federal courts sitting in diversity generally apply the law of the state in which they sit. However, cases that are transferred from one federal district to another present an exception to this general rule. When an action has been transferred, a federal court sitting in diversity must determine whether to apply the law of the transferor state, or the law of the transferee state in which it sits. If a district court receives a case pursuant to a transfer under 28 U.S.C. § 1406(a), for improper venue, or 28 U.S.C. § 1631, for want of jurisdiction, it logically applies the law of the state in which it sits, since the original venue, with its governing laws, was never a proper option. In contrast, when a case is transferred for convenience under 28 U.S.C. § 1404(a), the law of the transferor state is to be applied so long as the transferor state could properly have exercised jurisdiction.

Gerena v. Korb, 617 F.3d 197, 204 (2d Cir. 2010) (internal citations omitted).

In this case, defendants, none of which is a California citizen or domiciliary, were sued in California, and filed two motions prior to filing an answer: (1) a special motion to strike pursuant to California's Anti-SLAPP statute and (2) a motion to dismiss arguing that the California court did not have personal jurisdiction over any of the defendants. (See Defendants' Special Motion to Strike Complaint for Malicious Prosecution per Cal. CCP 425.16 (Jan. 3, 2011), ECF No. 11; Motion to Dismiss at 4-12). Before the court ruled on either of these motion, the parties stipulated to a transfer to this Court pursuant to 28 U.S.C. § 1404(a). (See Stipulation to Transfer). Because the transfer was effected for the convenience of the parties and prior to any ruling on the jurisdictional question, in order to determine the choice-of-law issue in this case, the Court must first answer the question of whether the California court had personal jurisdiction over defendants.*fn2

I. The California Court had Personal Jurisdiction over Defendants In the absence of a federal statute conferring jurisdiction, personal jurisdiction is determined

according to the law of the state in which the district court sits. See Harris Rutsky & Co. Ins. Servs., Inc. v. Bell & Clements Ltd., 328 F.3d 1122, 1129 (9th Cir. 2003); Thomas v. Ashcroft, 470 F.3d 491, 495 (2d Cir. 2006). Because the question here is whether California would have had personal jurisdiction over defendants, California law applies.

California's long-arm statute "is co-extensive with federal due process requirements, so the jurisdictional analyses under [California] law and federal due process are the same." Mavrix Photo, Inc. v. Brand Techs., Inc., 647 F.3d 1218, 1223 (9th Cir. 2011). Due process requires that court may exercise personal jurisdiction over a nonresident only when there are "'certain minimum contacts' with the relevant forum 'such that the maintenance of the suit does not offend "traditional notions of fair play and substantial justice."'" Mavrix Photo,, 647 F.3d 1223 (9th Cir. 2011) (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 90 L. Ed. 95 (1945)). There are two varieties of personal jurisdiction--general and specific. A court's general jurisdiction is based on a defendant's general contacts with the forum, and may be exercised even over a case in which the subject matter of the suit does not arise from those contacts. See Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414-15 & n.9, 104 S. Ct. 1868, 80 L. Ed. 2d 404 (1984). Specific jurisdiction, on the other hand, may be exercised only when the suit arises out of or is related to the defendant's contacts with the forum state. Id. at 414 & n.8.

General jurisdiction over foreign defendants exists "when their affiliations with the State are so 'continuous and systematic' as to render them essentially at home in the forum State." Goodyear Dunlop Tire Operations, S.A. v. Brown, - U.S. -, 131 S. Ct. 2846, 2851, 180 L. Ed. 2d 796 (2011). Liberty does not assert that the California court had general jurisdiction over defendants. (See Opp. at 10-11 (arguing only that the California court had specific jurisdiction over defendants). The Court ...

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