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STAFFORD v. CYBER DYNE LIQUIDATING CORPORATION

United States District Court, S.D. California


September 2, 2005.

JOHN S. STAFFORD, III, an individual, and DAVID W. LOBDELL, an individual, Plaintiff,
v.
CYBER DYNE LIQUIDATING CORPORATION, a Delaware corporation, a/k/a CYBER DYNE LIQUIDATION CORPORATION; WEINTRAUB DILLON, PC, a California professional corporation; RICHARD A. WEINTRAUB, an individual; TIMOTHY P. DILLON, an individual; CARL LOVEGREN, an individual; and MICHAEL O'HAGAN, an individual, Defendants.

The opinion of the court was delivered by: WILLIAM HAYES, District Judge

ORDER GRANTING DEFENDANTS' SPECIAL MOTIONS TO STRIKE

[Doc. No.'s 12; 17; 22]

Defendants Timothy P. Dillon, Richard A. Weintraub, Weintraub Dillon P.C. and Michael O'Hagan (collectively "Defendants") each move to strike Plaintiffs' complaint, pursuant to California Code of Civil Procedure 425.16. Plaintiffs John S. Stafford and David W. Lobdell (collectively, "Plaintiffs") oppose Defendants' motions. On August 4, 2005, the Court held a hearing on Defendants' motions and now issues the following order. I. Factual Background

  This malicious prosecution action brought by Plaintiffs John S. Stafford III ("Stafford") and David W. Lobdell ("Lobdell") arises out of a failed state court lawsuit brought by the Defendants in this action. The underlying case concerned a complex series of transactions involving the acquisition of certain corporate assets owned by All Optical Networks ("AON") by one of AON's directors. The Defendants in this case were the plaintiff, officers of the plaintiff and attorneys for the plaintiff in the underlying action. After three rounds of amended complaints, several depositions, and extensive motion practice the underlying case was voluntarily dismissed. Thereafter, Plaintiffs instituted the instant action.

  A. AON Networks

  AON was a company specializing in the development of optical technology to facilitate the routing and transfer of data. Weintraub Declaration in Support of Special Mot. to Strike ("Weintraub Decl No. 1."), ¶ 16. AON was formed in or about September 2000. Id. at ¶ 9. According to Defendants, at its formation, AON was worth approximately $21 million dollars. Id. at ¶ 19. AON was an off-shoot of a company named Cyber Dyne Computer Corporation ("Cyber Dyne"). According to Defendants, in 2000 Cyber Dyne transferred all of its intellectual property to AON in exchange for approximately 16 million shares of AON stock. Id. at ¶ 9. Defendants contend that after the transfer, Cyber Dyne owned nearly 77% of the outstanding AON stock. Id. at ¶ 20. In conjunction with the transfer, the Cyber Dyne shareholders created a liquidating trust (the "CDC Trust") to hold the AON stock, and avoid certain negative tax consequences related to the transaction. Id. at ¶ 11. The trustee for the CDC Trust was a Delaware corporation named the Cyber Dyne Liquidating Corporation (the "Trustee").

  Defendant Richard Weintraub ("Weintraub") declares that he performed various legal services for some of the CDC Trust beneficiaries and through that work he learned about AON, its technology, its value and the CDC Trust percentage ownership in the AON stock. Id. at ¶¶ 6-21. B. The July 2002 CDC Trust Beneficiary Meeting & The Comp-Optics Transaction

  According to Defendant Weintraub, in or around July 2002, Weintraub was contacted by a CDC Trust beneficiary and was invited to attend a beneficiary meeting where the keynote speaker was Michael Lee ("Lee"), who at the time was an AON director and a CDC Trust beneficiary. Id. at ¶¶ 26-27. Defendant Weintraub attended the meeting and learned that the percentage interest of the CDC Trust in AON had been "diluted" to approximately less than 50%. Id. at ¶ 28. According to Defendant Weintraub, he learned that AON had been issuing preferred stock to finance the company's operations and that John S. Stafford III's ("Stafford") was purchasing most of that stock. Id. at ¶ 28. In addition, Defendant Weintraub declares that at the meeting he learned that AON was in the "pre-production" process of developing a new product called OC192, a potential new version of AON's "Metro Scout" product. However, he also learned that AON was running out of money and that it needed approximately 3 million dollars to fund "the fabrication of the OC192 product and continue AON's day-to-day operations." Id. at ¶ 29.

  Defendant Weintraub declares that at the meeting, many of the CDC Trust beneficiaries were concerned and "many of the beneficiaries did not understand how a company that just a year ago was valued in excess of 21 million dollars could now be on the verge of bankruptcy." Id. at ¶ 30. According to Defendant Weintraub, several beneficiaries approached Mr. Lee and requested "that he put together a private placement memorandum ("PPM") so that they could try to raise the necessary capital to sustain AON." Id. at ¶ 30. Defendant Weintraub believed that David Lobdell ("Lobdell"), then Senior Vice President of Administration & Legal Affairs of AON, would prepare the PPM. Id. at ¶¶ 18, 31. However, according to Defendant Weintraub, Lobdell did not provide the requested documents to raise money for AON until two months after the meeting. Id. at ¶ 32. In Defendant Weintraub's view this was an excessive amount of time to prepare the documents, in light of AON's precarious financial condition. Further, following the preparation of the documents by Lobdell, the beneficiaries were given only three weeks to obtain three million dollars in funding. Id. at ¶ 32. Mr. Weintraub declares that: The foregoing facts led me to believe that AON had no intention of allowing its beneficiaries to raise funding in order to sustain the company. Rather, it appeared that the goal of the company and some of its directors, including but not limited to Mr. Lobdell, was simply to dissolve the corporation and allow Mr. Stafford to purchase the AON assets below market value.

 Id. at ¶ 32.

  In or around October 2002, Defendant Weintraub was contacted by either Mr. Lee or Bob Yukes ("Yukes"), both of whom were directors of the Trustee at the time. Id. at ¶ 33. Either Mr. Lee or Mr. Yukes requested Defendant Weintraub "look over documents concerning the proposed acquisition of certain AON assets by a company called Comp-Optics," a company wholly owned by Mr. Stafford. Id. at ¶ 33. Defendant Weintraub declares that he learned that a letter of intent ("LOI") between Comp-Optics and AON had been approved by the AON board, but that Mr. Lee was objecting to the formal terms of the transaction that were contained in the final Asset Purchase Agreement ("APA"). Id. at ¶¶ 34, 40-44.

  Plaintiffs' view of the Comp-Optics Transaction, not surprisingly, differs from Defendants. Plaintiffs assert that all members of the AON board knew that Stafford owned Comp-Optics and that at the time of the sale AON was in dire financial straits. Plaintiffs also argue that after diligently trying to finance AON and considering other strategic options, the AON board determined that its best option was to accept an offer from Comp-Optics to purchase the HPIC assets. Pursuant to the APA, Comp-Optics purchased all of the HPIC assets and paid AON $400,000 in cash and assumed $112,000 in liabilities. Stafford also released a security interest he held in the HPIC assets in order for the HPIC assets to be sold to Comp-Optics.

  C. Weintraub's Investigation

  In reviewing the Comp-Optics' LOI and the APA, Mr. Weintraub declares that he noticed that the transaction was between AON and one its directors, Mr. Stafford. Id. at ¶ 35. Further, Defendant Weintraub declares that terms of the LOI required AON to sell "the entirety of its assets for only $501,000." Id. at ¶ 36. According to Defendant Weintraub, the $501,000 amount was comprised of a $500,000 contract price for the purchase of the HPIC assets and an option to buy the remaining AON assets, such as Metro Scout, for $1,000. Id. at ¶ 36. The LOI also contained a covenant not to sue Mr. Stafford. Id. at ¶ 37.*fn1 Defendant Weintraub also learned that the LOI contained a license agreement that would allow Comp-Optics to use all of the technology of AON in the development and production of the HPIC assets. Id. at ¶ 38. According to Defendant Weintraub, that license meant that Mr. Stafford had the legal right to use all of AON's "intellectual property which, of course, diminished such property's value to other potential investors or purchasers." Id. at ¶ 38.

  Between October 2002 and November 2002, Defendant Weintraub exchanged email messages and reviewed (and/or assisted in drafting) certain letters by Mr. Lee to the AON board regarding the LOI. Mr. Lee's letters raised objections to the final terms and conditions contained in the Asset Purchase Agreement. In or around November 2002, Defendant Weintraub began representation of another company named Interphotonics in its attempt to purchase the remaining AON assets. Id. at ¶ 47. Defendant Weintraub declares that he had the "express written consent of the director of the Trustee for the CDC Trust" to represent Interphotonics. Id. at ¶ 47.

  In or around March 2003, Ed Sullivan*fn2 and Defendant O'Hagan contacted Defendant Weintraub. Id. at ¶ 50. Defendant Weintraub declares that he knew that Mr. Sullivan was a CDC Trust beneficiary and also a founder of Cyber Dyne. Id. at ¶ 47. Further, Defendant Weintraub declares that he knew that Defendant O'Hagan was a former Chief Technical Officer of AON, a CDC Trust beneficiary and the director of the Trustee for the CDC Trust. Id. at ¶ 49. Following a discussion with Mr. Sullivan and Defendant O'Hagan, Defendant Weintraub declares that he investigated the Comp-Optics transaction further. Id. at ¶ 50.

  According to Defendant Weintraub, through the course of his investigation he learned that the HPIC assets had "tremendous implications for national security." Id. at ¶ 54. Specifically, in the context of nuclear warfare, the HPIC technology could enable computer and communication infrastructure to withstand an electro magnetic pulse emitted during a nuclear explosion. Id. at ¶ 54. HPIC technology relies on light, rather than electrons, and therefore would not be effected by an electro-magnetic pulse. Id. at ¶ 54. Defendant Weintraub declares that he "learned that the Department of Defense was very interested in this technology." Id. at ¶ 54.

  During his investigation, Defendant Weintraub also declares that he learned that Stafford's offer to the AON board required a decision by the board in roughly one day. Id. at ¶ 66. Defendant Weintraub also learned of objections to the transaction made by Mr. Lee and Peter Sahagan at various board meetings. Id. at ¶¶ 65-67.

  D. The Underlying Lawsuit

  Eventually, on October 17, 2003, the Trustee filed a lawsuit captioned Cyber Dyne Liquidating Corporation v. All Optical Networks, Inc. et al., Case No. GIC 819673, in the Superior Court of California in and for the County of San Diego ("the underlying suit" or "underlying action"). At the time of the filing of the underlying suit, Defendant O'Hagan was the director and officer of the Trustee. Defendants Weintraub, Timothy P. Dillon ("Dillon"), and Weintraub Dillon P.C. (collectively "the attorney defendants") were counsel to the Trustee in the underlying action. The named defendants in the underlying action were former and then current officers and directors of AON.

  The Trustee alleged that AON's officers and directors breached their fiduciary duties to the AON stockholders. Specifically, the Trustee asserted causes of action for (1) breach of duty of loyalty in violation of Delaware Corporations Code § 144(a); (2) breach of duty of care; (3) breach of duty of good faith; (4) unauthorized sale of all or substantially all assets in violation of Delaware Corporations Code § 271; (5) unauthorized dissolution; (6) breach of duty to disclose in business transactions; (7) fraudulent concealment; (8) breach of a fiduciary's duty to disclose; (9) intentional misrepresentation; and (10) negligent misrepresentation. In later amended complaints the plaintiffs added causes of action for civil conspiracy, aiding and abetting breach of fiduciary duty and fraud, and unfair business practices.

  The causes of action in the underlying action arose out of two categories of transactions. The first category involved Stafford's investment in AON. The plaintiffs in the underlying action alleged that Stafford conspired with the other defendants in the underlying action to allow Stafford to purchase a majority of the AON stock at below fair value in order to loot the company one year later. Defendant Weintraub Dillon P.C. and Richard A. Weintraub's Notice of Lodgment ("DNOL") Ex. Y [Third Amended Complaint ("TAC"), ¶¶ 23-58]. The second transaction involved AON's sale of its "HPIC" assets in October 2002 to Comp-Optics. Id. at ¶¶ 59-117.

  The defendants in the underlying action brought a demurrer to the original complaint. On March 22, 2004, the Trustee filed a first amended complaint. DNOL, Ex. T. On March 29, 2004, Defendant O'Hagan was replaced as director of the Trustee by Carl Lovegren ("Lovegren"), a CDC Trust beneficiary. Weintraub Decl. No. 1, ¶ 93. The defendants demurred to the first amended complaint. On July 15, 2004, the Honorable Jay M. Bloom issued an order "sustaining and overruling demurrers." DNOL, Ex. U. Judge Bloom ruled that "Plaintiffs [in the underlying action] have not sufficiently alleged that demand on the corporation's Board of Directors would have been futile." DNOL, Ex. U, p. 1. In addition, Judge Bloom ruled:

[P]laintiffs have alleged only that the demand would have been futile as to only 3 out of 9 directors. Since this is not a majority of the board, they have not pled facts to create a reasonable doubt that a majority of the directors were disinterested and independent. They also have not pled facts to suggest a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. As such, the demand futility requirement has not been met and the demurrers are sustained.
Id. at pp. 3-4. Judge Bloom overruled the demurrer to the twelfth cause of action for aiding and abetting breach of fiduciary duty and fraud, holding that "Comp-Optics, as a non-fiduciary, may be liable for aiding and abetting a fiduciary's breach." Id. at p. 5. The court also granted plaintiffs leave to amend their complaint.

  On August 5, 2004, the Trustee filed a second amended complaint. Defendants again demurred. On November 2, 2004, Judge Bloom issued an order (1) overruling the demurrer filed by Comp-Optics to the sixth cause of action, (2) sustaining with leave to amend the demurrer to the ninth cause of action, (3) and sustaining without leave to amend the demurrer to the eleventh cause of action. DNOL, Ex. X, p. 1. E. The Depositions of Dr. O'Hagan & Michael Lee

  Following the filing of the demurrer to the second amended complaint, on October 26, 2004, defendants deposed Mr. Lee.*fn3 Mr. Lee testified that although he voted in favor of the Term Sheet for the sale of assets from AON to Comp-Optics, he had an issue with the actual Asset Purchase Agreement.

 

Q. Okay. Now, with respect to the actual asset purchase agreement that came and was signed after this term sheet was agreed on, did you have a problem with that?
A. Yes.
Q. Why?
A. Because when you — when I looked at the schedule of assets being transferred, I was of the strongest opinion that it way exceeded the scope of this agreement that I had voted for. And I made that clear in verbal and written communications and requested a board meeting be held to — to discuss this agreement.
Q. And specifically you were upset because you thought that there was one patent or patent application that had been transferred, but you learned later that it was more than one patent application and that's why you were upset?
A. Well, when you read this agreement, if you read it carefully, it says that he's going to buy the HPIC technology and he has the right to a — basically a free license to all of the other technology. But what was listed in the asset purchase agreement on the schedule was patents that he would own that were not going to be licensed, that were going to be taken out of the domain of AON. So it went from a licensing situation to an ownership.
Declaration of Virginia H. Gaburo, Ex. C. (Excerpts of Deposition of Mr. Lee), pp. 150-52. In addition, Mr. Lee testified that "the surprise for me was that he [Stafford] was going to own 14 times more of whatever it was than what I thought I was voting on." Id. at 180. Further, Mr. Lee testified at the time he voted for the term sheet he was unaware of certain patent applications filed by AON regarding the HPIC technology. Id. at p. 156. However, Mr. Lee testified that he could not put a dollar value on AON's intellectual property ("I can't put a dollar value on intellectual property all by itself."). Katsell Decl., Ex. A (Excerpts of Deposition of Mr. Lee), p. 218. Mr. Lee testified to the financial condition of AON at the time of the Comp-Optics Transaction. Mr. Lee testified that in 2002, AON required roughly $15 million dollars to keep the Metro Scout program going. Katsell Decl., Ex. A (Excerpts of Deposition of Mr. Lee), p. 103. Mr. Lee also testified about the allegations contained in the complaints, and his opinion regarding the conspiracy cause of action:
Q. Okay. Mr. Lee, which causes of action can you — which causes of action of the causes of action in this complaint do you believe the allegations surrounding those causes of action are not true or that there's no validity to those causes of action?
A. Well, I was on the board. I was involved in trying to fund the company. I was involved in, I guess, the inner workings. And one of these allegations, I don't know which it is, alleges that there was like a conspiracy for — for Stafford to try to bleed the company and buy it. And my reaction to that is that he could have done that almost a year before when the company was out of money, and he was very upset at Peter Sahagen, who was tasked with the fund raising for the company. And despite the fact that we were down to our last million and only had a few months burn rate, you know, Mr. Stafford put in his own money and I think brought in 5 or $6 million. So if he was going to bleed it and try and buy it, he was pretty stupid because he spent $6 million more than he should have to do it. He could have done it way sooner and could have had it. So to me it's a spurious claim that there's a conspiracy for him to get together with others and try to bleed the company when he paid an extra $6 million to do it.
Q. So in your view Mr. Stafford never conspired with any members of the board or any other persons affiliated with AON or Comp-Optics to loot the company of all its assets?
A. Well, I don't think — I just don't buy into the conspiracy theory that he was going to come up — you know, that he somehow had this master plan to bleed the company to make it dry. I think to his detriment put a lot of money into the company, put in more money than anybody else and had more to risk, and I think he did it despite the opposition and the weirdness of Mr. Sahagen that everyone tried to work around. And I think he was working under extraordinary circumstances trying to get things done and was frustrated by, you know, the shenanigans of Sahagen.
Id. at pp. 263-64.

  Mr. Lee also testified that in 2000 someone did make a reference to paying $75 million dollars for Cyber Dyne's technology. Katsell Decl., Ex. A (Excerpts of Deposition of Mr. Lee), p. 56. However, Mr. Lee did not view the reference as an offer or an event reportable to the board. Id. at p. 57.

  On November 3, 2004, the deposition of Defendant O'Hagan was taken by defendants in the derivative action. During his deposition Defendant O'Hagan testified about the financial difficulties AON experienced in 2002. Defendant O'Hagan testified that AON experienced financial difficulties in 2002 and that "in the preceding two years, the optical communications market had fallen like a rock, the whole market potential." Katsell Decl., Ex. A (Excerpts of Deposition of Dr. O'Hagan), p. 82. Further,

Q. So there was no investment in AON or potential investment in the summer of 2002, and that led you to believe that things were not going to work out?
. . .
A. Well, I just was under the impression that they were having a hard time getting capital. As I say, this is not something I took part in.
Id. at p. 82.

  Defendant O'Hagan also testified on the subject of the HPIC assets. Defendant O'Hagan testified that one of the goals of the HPIC technology was to find a cheaper way to replace some of the parts used in the Metro Scout project. Id. at p. 106. Further,

Q. So in the summer of 2002, was there more than just a concept with respect to HPIC?
A. There were initial prototype-working models in MetroScout cost — I can't remember whether it was $1,600 a piece or $2,400 a piece, and the goal of some of this HPIC development was to create a replacement for that — that circulator and do it with a chip that probably would cost, you know, less than 100 bucks. . . .
. . .
Q. Is it fair to say that in the summer of 2002, HPIC was an unproven concept?
A. No. I would say it's proven, a proven concept, but I don't think it was anything beyond that.
. . .
Q. Was there a separate HPIC product or what could have been a product that was meant to be sold outside of MetroScout in the summer of 2002?
A. Not my knowledge.
Q. And do you know of any alternative applications of this particular technology, HPIC, besides its use in something like a MetroScout in telecommunications?
A. It could potentially be used to route — route optical signals in a computing environment, and we'll see that when we go over the presentation.
Q. When you say, "could potentially," you mean it hasn't yet or it didn't in 2002 certainly?
A. No, I mean exactly what I said. It has the potential to do that, ultimately, when it's properly developed.
Q. In the summer of 2002, there was nothing commercialized though with respect to — A. No, there was not.
Id. at pp. 114-15.

  Defendant O'Hagan also testified concerning the interest of certain investors and governmental agencies in the HPIC technology. Defendant O'Hagan testified that in May 2000, a German investor named Wolfgang Grahber made an offer for a 51% interest in "the communication side of Cyber Dyne." Katsell Decl., Ex. A (Excerpts of Deposition of Dr. O'Hagan), pp. 53-54. According to Defendant O'Hagan, Mr. Grahber showed him a check for $75 million dollars. Id. However, Defendant O'Hagan further testified that he did not have the power to negotiate with Mr. Grahber. Id. at p. 55.

  Further, Defendant O'Hagan testified that he was scheduled for a visit in Washington, D.C. with the Justice Department, DARPA, the State Department Science Officer and the National Institute of Science and Technology about the HPIC technology. Id. at p. 121. However, the governmental entities did not make immediate offers for the technology. Id. at p. 196.

  Defendant O'Hagan also testified regarding the potential dollar value of the HPIC assets. For instance, Defendant O'Hagan was asked about the patent applications for the HPIC assets:

Q. . . . assuming these were the patent filings that comprised the HPIC assets, do you have an opinion about their cumulative dollar value?
A. I would say it's probably in the order of 50,000 to 100,000 bucks in this one.
Q. Why? What's the basis —
A. A patent filing doesn't really give you any real protection to develop a business on. Granted patents do.
. . .
Q. $400,000 would not be unreasonable to pay for the 13 filings that are listed in Exhibit 5, plus all the other assets that you had previously described being associated with HPIC?
. . .
A. I guess I'd like to see the valuation on the other assets and what they really were, but it doesn't sound unreasonable at this point to me.
Id. at p. 150, 153.

 

However, Dr. O'Hagan also testified as follows: Q. Did you have any idea what you thought the HPIC was worth in the summer of 2002?
. . .
A. Okay. My opinion is it could potentially be worth hundreds of millions to billions of dollars.
Declaration of Virginia H. Gaburo ("Gaburo Decl."), Ex. C. (Excerpts of O'Hagan Decl.), p. 132.

  Further, Defendant O'Hagan testified that with respect to the patent filings "I think if — conditional, that these filings are all granted, that this could be worth building a whole business on, probably on orders of hundreds of millions." Id. at p. 149. Defendant O'Hagan also testified that he would have accepted $400,000 for the HPIC technology if it was the only way to save the business and avoid employee job loss. Id. at p. 161.

  F. The Termination of the Underlying Case

  On or about November 17, 2004, Stafford filed a lawsuit in the California Superior Court for the County of San Diego alleging that Weintraub Dillon aided and abetted the Trustee for the CDC Trust in a breach of fiduciary duty. Weintraub Decl. No. 1, ¶ 102. According to Defendant Weintraub, that suit "created a conflict of interest between Weintraub Dillon and the Trustee, such that in or around December 2004, Weintraub Dillon moved the Court to withdraw as counsel for the Trustee." Id.

  On or about November 27, 2004, the Trustee filed a third amended complaint. DNOL, Ex. Y. On or about January 19, 2005, Weintraub Dillon's motion to be relieved as counsel was granted by Judge Bloom. DNOL, Ex. AA. In a letter dated January 18, 2005, Mr. Lovegren wrote a letter to the CDC Trust beneficiaries. In the letter Mr. Lovegren wrote:

This letter serves to inform the members of the Trust as to the status of the pending lawsuit and other pertinent matters. Unfortunately, I must report that the Trust's legal counsel Weintraub-Dillon was forced to be relieved from the case due to a conflict of interest occasioned by legal actions commenced by the defendants against the Trustee and its legal counsel.
At a Court appearance this past week, the Judge gave the Trust two weeks to retain new counsel. I am currently consulting with various law firms on the merits of this case in an effort to find replacement counsel. There have been many members who have inquired as to having this case assigned to a law firm on a contingency basis. To this date there is no law firm willing to take this case on a contingency.
. . . At present, the Trust has $5,523.95 in its coffers. Obviously, we are at a crisis point financially.
DNOL, Ex. BB. In addition, Mr. Lovegren included in his letter a list of "important items that have occurred recently." Id. Among that list Mr. Lovegren wrote, "6) The Court ruled against the California litigation in the demurrer phase of the case. We are currently on our third amended complaint" and "7) Testimony received in depositions conducted thus far has been detrimental to the case." Id.

  At some point, Stafford and Lobdell served Weintraub Dillon and the Trustee with a motion for sanctions in the amount of $445,056.77, pursuant to California Code of Civil Procedure section 128.7. Katsell Decl., Ex. C. On or about January 28, 2005, the Trustee dismissed the underlying case. Thereafter, on March 23, 2005, two of the named defendants in the underlying action, John S. Stafford III ("Stafford") and David W. Lobdell ("Lobdell"), filed the instant malicious prosecution action.

  II. California's Anti-SLAPP Statute

  California law disfavors certain lawsuits designed to chill free speech activities. Such suits are known as Strategic Litigation Against Public Participation, or "SLAPP," lawsuits. In 1992, the California State Legislature found that:

[T]here has been a disturbing increase in lawsuits brought primarily to chill the valid exercise of the constitutional rights of freedom of speech and petition for the redress of grievances. The Legislature finds and declares that it is in the public interest to encourage continued participation in matters of public significance, and that this participation should not be chilled through abuse of the judicial process. To this end, this section shall be construed broadly.
Cal. Code Civ. Proc., § 425.16(a). California Code of Civil Procedure section 425.16 ("section 425.16") permits a defendant to dismiss a lawsuit if the alleged bad acts arose from his or her exercise of free speech "in connection with a public issue" and if the plaintiff cannot show a probability of success on his or her claims. Cal. Code Civ. Proc., § 425.16(b)(1). In Federal district courts sitting in diversity jurisdiction, California's Anti-SLAPP statute is an available pretrial procedure to challenge claims. U.S. ex rel. Newsham v. Lockheed Missles & Space Co., 190 F.3d 963, 971-73 (9th Cir. 1999). In a special motion to strike under the Anti-SLAPP statute, the defendant has the initial burden of making a prima facie showing that the plaintiff's claims are subject to section 425.16. Equilon Enterprises, LLC v. Consumer Cause, Inc., 29 Cal. 4th 53, 67 (2002); ComputerXpress, Inc. v. Jackson, 93 Cal. App. 4th 993, 999 (2001). If the defendant makes that showing, the burden shifts to the plaintiff to establish a probability of prevailing, by making a prima facie showing of facts which would, if proved, support a judgment in the plaintiff's favor. ComputerXpress, 93 Cal. App. 4th at 999.

  III. Discussion

  A. Plaintiffs' Claims Are Subject to the Anti-SLAPP Statute

  Defendants have met their burden to establish that Plaintiffs' claims are subject to section 425.16. A cause of action arising from a defendant's alleged improper filing of a lawsuit is an appropriate subject of a motion to strike under the anti-SLAPP statute. Mattel, Inc. v. Luce, Forward, Hamilton & Scripps, 99 Cal. App. 4th 1179, 1188 (2002); Chavez v. Mendoza, 94 Cal. App. 4th 1083, 1087 (2001). Here, Plaintiffs have sued Defendants for malicious prosecution on the basis of Defendants' alleged improper filing of a previous civil complaint. Accordingly, Plaintiffs' claims fall within the ambit of section 425.16.

  B. Have Plaintiffs Established a Probability of Prevailing?

  Because Defendants have met their burden to show Plaintiffs' claims are subject to section 425.16, the burden shifts to Plaintiffs to establish a probability of prevailing, by making a prima facie showing of facts which would, if proved, support a judgment in Plaintiffs' favor. ComputerXpress, 93 Cal. App. 4th at 999. "To satisfy this prong, the plaintiff must `state ? and substantiate ? a legally sufficient claim.'" Jarrow Formulas, Inc. v. LaMarche, 31 Cal. 4th 728, 741 (2003) (quoting Rosenthal v. Great Western Fin. Securities Corp., 14 Cal. 4th 394, 412 (1996). "`Put another way, the plaintiff `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.'" Wilson v. Parker, Covert & Chidester, 28 Cal. 4th 811, 821 (2002). Whether the Plaintiffs have established a prima facie case is a question of law. Zamos v. Stroud, 32 Cal. 4th 958, 965 (2004). "In deciding the question of potential merit, the trial court considers the pleadings and evidentiary submissions of both the plaintiff and the defendant [citation]; though the court does not weigh the credibility or comparative probative strength of competing evidence, it should grant the motion if, as a matter of law, the defendant's evidence supporting the motion defeats the plaintiff's attempt to establish evidentiary support for the claim." Chidester, 28 Cal. 4th at 821.

  The Tort of Malicious Prosecution

  To establish a cause of action for malicious prosecution, a plaintiff must demonstrate that a prior action (1) was commenced by or at the direction of the defendant and was pursued to a legal termination in plaintiff's favor; (2) was brought without probable cause; and (3) was initiated with malice. Sheldon Appel Co. v. Albert & Oliker, 47 Cal. 3d 863, 871 (1989). The tort of malicious prosecution has traditionally been regarded as a disfavored cause of action because of its potential to impose a chilling effect on the ordinary citizen's willingness to bring a civil dispute to court or report criminal conduct. Id. at 872.

  1. Termination of the previous case in favor of the plaintiff

  The first element of a malicious prosecution cause of action is that the underlying case must have been terminated in favor of the malicious prosecution plaintiff. "The basis of the favorable termination element is that the resolution of the underlying case must have tended to indicate the malicious prosecution plaintiff's innocence." HMS Capital, Inc. v. Lawyers Title Co., 118 Cal. App. 4th 204, 214 (2004). "When prior proceedings are terminated by means other than a trial, the termination must reflect on the merits of the case and the malicious prosecution plaintiff's innocence of the misconduct alleged in the underlying lawsuit." Id. A "technical" or "procedural" termination is not favorable for purposes of a malicious prosecution claim. Casa Herrera, Inc. v. Beydoun, 32 Cal. 4th 336, 342 (2004). Examples of terminations not favorable for purposes of malicious prosecution claims include dismissals (1) on statute of limitations grounds; (2) pursuant to a settlement; or (3) on the grounds of laches. Id. "Where a proceeding is terminated other than on its merits, the reasons underlying the termination must be examined to see if it reflects the opinion of either the court or the prosecuting party that the action would not succeed." Haight v. Handweiler, 199 Cal. App. 3d 85, 88 (1988) [internal citations omitted]. "If the resolution of the underlying actions leaves some doubt concerning plaintiff's innocence or liability, it is not a favorable termination sufficient to allow a cause of action for malicious prosecution." Pattiz v. Minye, 61 Cal. App. 4th 822, 827 (1998). For instance, a dismissal as a sanction for failure to comply with a discovery order generally will not reflect the innocence of the defendant in an underlying case or the merits of that action and thus is not favorable for malicious prosecution purposes. Id.

  Here, Plaintiffs argue that the termination of the underlying action was favorable for malicious prosecution purposes. According to Plaintiffs "Mr. Lovegren's declaration establishes as a matter of law that the Derivative Action was voluntarily dismissed on the merits and irrefutably establishes a favorable termination." Opposition Br., p. 9. In his declaration, Mr. Lovegren declares that "I believe that the Derivative Action should never have been filed." Lovegren Decl., ¶ 20. Further, Mr. Lovegren declares that he was surprised by certain testimony by Mr. Lee and Defendant O'Hagan. Lovegren Decl., ¶¶ 10-12.

  Mr. Lovegren also declares that despite the letter he sent to the CDC Trust beneficiaries citing the dire financial situation as fatal to the underlying suit, the financial situation "was not the primary reason for my ultimate decision to dismiss the case." Lovegren Decl., ¶ 19. According to Lovegren, "[e]ven if the Trustee had money to pursue the claims and had legal counsel for the Derivative Action, I still would have dismissed the case because any chance of the Trustee prevailing on its claims was highly unlikely." Id. at ¶ 19. However, contrary to Plaintiffs' opposition brief, Mr. Lovegren did not declare that he dismissed the underlying action because it lacked merit, rather he declared that "prevailing on its claims was highly unlikely." Id.

  Defendants disagree with Plaintiff's contentions. Defendants each argue that the underlying case did not result in a favorable termination for Plaintiffs because, according to Defendants, the case was dismissed without prejudice "based on a practical decision driven solely by economic considerations." Weintraub Dillon & Weintraub's Mem. of Points & Authorities in Support of Special Motion to Dismiss ("Weintraub Mem."), p. 1. See Dillon's Mem. of Points & Authorities in Support of Special Motion to Dismiss ("Dillon Mem."), p. 8. Defendants point to the letters by Defendant O'Hagan to the CDC Trust beneficiaries requesting additional funding to continue the litigation. Weintraub Mem., p. 10. Defendants also point to the January 18, 2005 letter by Mr. Lovegren to the CDC Trust beneficiaries explaining the dire financial conditions facing the Trust. In addition, Defendants argue that Mr. Lovegren's declaration is in conflict with (1) his letter to the CDC Trust beneficiaries seeking additional money to pursue the claims, (2) his investment of his own money to pursue the claims, and (3) his filing of the third amended complaint.

  The Court finds that Plaintiffs have failed to demonstrate a probability of prevailing by establishing the element of termination of the underlying case in their favor. Plaintiffs' reliance on Mr. Lovegren's declaration is insufficient to establish a prima facie case of termination in favor of Plaintiffs. As pointed out above, Mr. Lovegren declared that "[e]ven if the Trustee had money to pursue the claims and had legal counsel for the Derivative Action, I still would have dismissed the case because any chance of the Trustee prevailing on its claims was highly unlikely." Lovegren Decl. at ¶ 19. However, whether Mr. Lovegren believed the chance of the Trustee prevailing on its claims "was highly unlikely" or not fails to establish that the underlying suit lacked merit. The Court notes that "`[c]ounsel and their clients have a right to present issues that are arguably correct, even if it is extremely unlikely that they will win . . .'" Sheldon Appel Co. v. Albert & Oliker, 47 Cal. 3d 863, 885 (1989) (quoting In re Marriage of Flaherty, 31 Cal. 3d 637, 650 (1982).). Moreover, Plaintiffs over-state the value of the Lee and O'Hagan testimony in terms of the reason Defendants terminated the underlying suit. In many cases witnesses give favorable and unfavorable testimony during depositions. The fact that a witness testifies unfavorably does not mean a case lacked merit at the time it was initiated. Moreover, a decision to voluntarily dismiss a complaint once a party believes the prospects of victory are slim does not mean the suit was meritless when initiated. Such a result would surely have a chilling effect on litigation. Further, Defendants have submitted evidence, including Mr. Lovegren's letter to the CDC Trust beneficiaries, citing the dire economic state of affairs. In his letter, Mr. Lovegren wrote: "[w]ithout the support of the trust members we will not be able to continue the prosecution of the litigation against defendants." DNOL, Ex. BB [emphasis in original]. To the extent the underlying suit was dismissed for economic reasons, the Court notes that the California Court of Appeal has held that a termination of a case by voluntary dismissal based on a practical decision that further litigation was too expensive did not constitute a favorable termination for purposes of a malicious prosecution action. Oprian v. Goldrich, Kest & Assoc., 220 Cal. App. 3d 337, 343-44 (1990). According to the Oprian court:

It would be a sad day indeed if a litigant and his or her attorney could not dismiss an action to avoid further fees and costs, simply because they were fearful such a dismissal would result in a malicious prosecution action. It is common knowledge that costs of litigation, such as attorney's fees, costs of expert witnesses, and other expenses, have become staggering. The law favors the resolution of disputes. "This policy would be ill-served by a rule which would virtually compel the plaintiff to continue his litigation in order to place himself in the best posture for defense of a malicious prosecution action." [Citation omitted.]
Id. at 344-45.

  While this Court will not weigh the evidence presented by the parties in deciding this motion, the Court nevertheless takes notice of the evidence presented by Defendants revealing that the voluntary dismissal of the underlying action was based on financial considerations. Considering the existence of that evidence, the best case for Plaintiffs is that it is unclear whether the voluntary dismissal of the underlying suit constitutes a favorable termination. Moreover, as discussed above, excluding the evidence presented by Defendants, Plaintiffs' evidence does not clearly establish that the underlying action was dismissed because it lacked merit. "If the resolution of the underlying actions leaves some doubt concerning plaintiff's innocence or liability, it is not a favorable termination sufficient to allow a cause of action for malicious prosecution." Pattiz v. Minye, 61 Cal. App. 4th 822, 827 (1998). Accordingly, the Court concludes that Plaintiffs have failed to establish a probability of prevailing on the first element of their malicious prosecution claim — that the underlying lawsuit was terminated in their favor. 2. Probable Cause*fn4

  The probable cause element requires a "trial court to make an objective determination of the `reasonableness' of the defendant's conduct, i.e., to determine whether, on the basis of the facts known to the defendant, the institution of the prior action was legally tenable." Sheldon Appel Co. v. Albert & Oliker, 47 Cal. 3d 863, 878 (1989) In reviewing the probable cause element the Court notes that "`[c]ounsel and their clients have a right to present issues that are arguably correct, even if it is extremely unlikely that they will win . . .'" Sheldon Appel Co. v. Albert & Oliker, 47 Cal. 3d 863, 885 (1989) (quoting In re Marriage of Flaherty, 31 Cal. 3d 637, 650 (1982).). "Accordingly, there is probable cause if, at the time the claim was filed, `any reasonable attorney would have thought the claim tenable.'" Jarrow Formulas, 31 Cal. 4th at 742 (quoting Sheldon Appel, 47 Cal. 3d at 886). Indeed,

Probable cause may be present even where a suit lacks merit. Favorable termination of the suit often establishes lack of merit, yet the plaintiff in a malicious prosecution action must separately show lack of probable cause. Reasonable lawyers can differ, some seeing as meritless suits which others believe have merit, and some seeing as totally and completely without merit suits which others see as only marginally meritless. Suits which all reasonable lawyers agree totally lack merit — that is, those which lack probable cause — are the least meritorious of all meritless suits. Only this subgroup of meritless suits present[s] no probable cause.
Jarrow Formulas, 31 Cal. 4th at 743 n. 13 (quoting Roberts v. Sentry Life Insurance, 76 Cal. App. 4th 375, 382 (1999).

  a. Defendants Continued Pursuit of the Underlying Action Following O'Hagan and Lee's Depositions

  Plaintiffs argue that the evidence establishes that Defendants lacked probable cause in initiating and continuing to prosecute the underlying action. Opposition Br., p. 10. Plaintiff's first argue that Defendants continued prosecution of the underlying action despite the deposition testimony of O'Hagan and Lee, reveals a lack of probable cause. Opposition Br., p. 11 ("Before Defendants filed the TAC, Lee and O'Hagan testified at their depositions on October 26, 2004 and November 3, 2004, respectively, as to facts that gutted the core allegations supporting the entire Derivative Action complaint."). Plaintiffs point to excerpts of the depositions of O'Hagan and Lee in support of their argument. The Court examines each of Plaintiffs' points in turn.

  First, Plaintiffs argue that the third amended complaint alleged that at about the time Stafford invested in AON, AON had received an offer through O'Hagan from a German investor to invest $75 million in AON, but that during his deposition, O'Hagan testified that no such offer was made. Opposition Br., p. 11. The Court has reviewed the third amended complaint and Plaintiff's argument misrepresents the actual allegation contained in the third amended complaint and Defendant O'Hagan's testimony. The third amended complaint actually alleges that "[i]n or around 2001, Dr. Michael O'Hagan was approached by Wolfgang Grahber, as representative of a German investor, who presented a check in the amount of $75 million for a controlling interest in AON." DNOL, Ex. Y, ¶ 34. Mr. O'Hagan's deposition testimony confirms this allegation, although his deposition raised a question regarding the timing of Mr. Grahber's actions. Defendant O'Hagan testified that in May 2000, a German investor named Wolfgang Grahber made an offer for a 51% interest in "the communication side of Cyber Dyne." Katsell Decl., Ex. A (Excerpts of Deposition of Dr. O'Hagan), pp. 53-54. According to Defendant O'Hagan, Mr. Grahber showed him a check for $75 million dollars. Id. Although Defendant O'Hagan further testified that he did not have the power to negotiate with Mr. Grahber. Id. at p. 55. Despite the discrepancy in the time of the presentation, 2000 versus 2001, the core of the allegation is supported by O'Hagan's testimony. Therefore, the Court does not find that this evidence demonstrates a lack of probable cause for the allegations in the underlying action.

  Second, Plaintiffs argue that the third amended complaint alleges that at the time the HPIC assets were sold, AON had numerous funding opportunities, potential buyers and contracting opportunities with the government, but that Lee and O'Hagan testified that no viable opportunities for the funding or sale of the HPIC assets existed. Opposition Br., p. 12. However, in addition to the excerpts cited by Plaintiffs, O'Hagan testified regarding Mr. Grahber's presentation of a $75 million dollar check. Further, O'Hagan testified that he met with the Justice Department, DARPA, the State Department Science Officer and the National Institute of Science and Technology about the HPIC technology. However, the governmental agencies did not make immediate offers for the technology. Based on the actual transcript of the Lee and O'Hagan depositions the Court cannot say that filing paragraphs 85, 92-97, 99, 102, 108 of the third amended complaint lacked probable cause.

  Third, Plaintiffs argue that the conspiracy allegations in the third amended complaint lacked merit considering Lee's testimony that he did not believe Stafford had conspired to acquire the HPIC assets cheaply. Opposition Br., p. 12. During his deposition, Lee testified:

Q. Okay. Mr. Lee, which causes of action can you — which causes of action of the causes of action in this complaint do you believe the allegations surrounding those causes of action are not true or that there's no validity to those causes of action?
A. Well, I was on the board. I was involved in trying to fund the company. I was involved in, I guess, the inner workings. And one of these allegations, I don't know which it is, alleges that there was like a conspiracy for — for Stafford to try to bleed the company and buy it. And my reaction to that is that he could have done that almost a year before when the company was out of money, and he was very upset at Peter Sahagen, who was tasked with the fund raising for the company. And despite the fact that we were down to our last million and only had a few months burn rate, you know, Mr. Stafford put in his own money and I think brought in 5 or $6 million. So if he was going to bleed it and try and buy it, he was pretty stupid because he spent $6 million more than he should have to do it. He could have done it way sooner and could have had it. So to me it's a spurious claim that there's a conspiracy for him to get together with others and try to bleed the company when he paid an extra $6 million to do it.
Q. So in your view Mr. Stafford never conspired with any members of the board or any other persons affiliated with AON or Comp-Optics to loot the company of all its assets?
A. Well, I don't think — I just don't buy into the conspiracy theory that he was going to come up — you know, that he somehow had this master plan to bleed the company to make it dry. I think to his detriment put a lot of money into the company, put in more money than anybody else and had more to risk, and I think he did it despite the opposition and the weirdness of Mr. Sahagen that everyone tried to work around. And I think he was working under extraordinary circumstances trying to get things done and was frustrated by, you know, the shenanigans of Sahagen.
Katsell Decl., Ex. A (Excerpts of Deposition of Mr. Lee), pp. 263-64. The above testimony certainly provides material for a defense against the conspiracy allegation. However, Lee also testified that he believed the terms of the deal were at odds with those contained in the Asset Purchase Agreement and that he was surprised by the license Mr. Stafford received in the final deal. Further, there is no evidence that the Attorney Defendants relied solely on information from Mr. Lee in their investigation of the conspiracy allegation. The Attorney Defendants argue that Mr. Lobdell was involved in drafting the APA. Defendant Weintraub declares that he learned that (1) Lobdell and Stafford had a prior working relationship before their tenure at AON, (2) that Stafford was able to receive a security interest in the HPIC assets in return for a small loan to the company, and (3) Lobdell drafted the loan documents that gave Stafford a security interest in the HPIC assets. Weintraub Decl. No. 1, ¶¶ 71-72. Weintraub declares that "I concluded that because Mr. Lobdell was an officer/director of AON he knew of AON's financial troubles and, thus, prepared the loan documents with the intent of aiding Mr. Stafford's acquisition of the HPIC Assets at below market value." Weintraub Decl. No. 1, ¶ 74. Based on the information before the Court, the Court does not find that the conspiracy allegation was the most meritless of all meritless allegations.

  Fourth, Plaintiffs argue that the third amended complaint "continued to allege that the $400,000 purchase price for the HPIC assets was grossly unfair," despite certain testimony by O'Hagan that the HPIC technology was only worth $50,000 to $100,000 at the time it was sold. Opposition Br., p. 12. However, Mr. O'Hagan gave conflicting testimony on the issue of the value of the HPIC technology. While Mr. O'Hagan did testify that $50,000 to $100,000 was a fair price, assuming that certain patent filings comprised the HPIC assets,*fn5 he also testified that the HPIC assets might be worth "hundreds of millions to billions of dollars." Gaburo Decl., Ex. C, p. 132. In addition, Defendant Weintraub declares that "[t]he testimony of Dr. Michael O'Hagan concerning the fact that $400,000 was not an unreasonable price to pay for the HPIC assets contradicted the information provided to me by Dr. O'Hagan as well as Ed Sullivan and Bob Yukes (director of the Trustee for the CDC Trust) prior to filing the action." Weintraub Decl. No. 2, ¶ 5. Defendant Weintraub also declares that he reviewed an email to Mr. Sullivan from a CDC Trust beneficiary named Stephen Saltzburg, a Professor of Law at George Washington University, who wrote: If I understand what has occurred, AON has sold for a pittance ($400,000) the most valuable intellectual property that it possesses. . . . to learn that the most valuable part of the IP has been sold in what appears to be a sweetheart deal leaves me feeling that I was the victim of misrepresentations. I bet I am not alone.

 Weintraub Decl. No. 1, ¶ 70.

  The Court concludes that the potentially inconsistent testimony by Defendant O'Hagan when considered with the other evidence available to Defendants does not establish that Defendants lacked any probable cause for their allegations that the HPIC technology was worth more than Mr. Stafford ultimately paid for it.

  Fifth, Plaintiffs argue that certain testimony by Defendant O'Hagan contradicted allegations in the third amended complaint regarding a scientist named Alister McAulay. However, Plaintiffs fail to point to any specific allegation in the third amended complaint or the specific testimony Plaintiffs claim refutes that allegation. Accordingly, the Court is unpersuaded by this argument.

  Finally, Plaintiffs argue that Defendants' allegation in the underlying action that the Board vote on the Comp-Optics transaction was tainted because material facts had not been disclosed and material misrepresentations were made as to the number of patent applications that constituted the HPIC assets was undercut by O'Hagan's deposition testimony that the value of a patent application was at best speculative. Opposition Br., p. 13. It is unclear how that testimony by O'Hagan refutes the allegations contained in the third amended complaint. Defendant O'Hagan was not qualified as an expert on patent valuation. Further, Defendant O'Hagan may have opined that the value of a patent application was "speculative," however, that does not establish that Defendants lacked probable cause. Further, as previously discussed, Defendant Weintraub declares that he relied on a number of people in investigating the Comp-Optics transaction.

  b. Plaintiffs' Reliance on Zamos is Misplaced

  Plaintiffs argue that the alleged inconsistencies cited above, "establishes more than a prima facie case that Stafford and Lobdell will prevail on the lack of probable cause element of their malicious prosecution claim." Opposition Br., p. 13. Plaintiffs rely on the California Supreme Court's holding in Zamos v. Stroud in support of their position. Plaintiffs' reliance is misplaced.

  In Zamos, the California Supreme Court held that an attorney may be held liable for malicious prosecution for continuing to prosecute a lawsuit discovered to lack probable cause. Zamos v. Stroud, 32 Cal. 4th 958, 960 (2004). There, the malicious prosecution lawsuit was based on a fraud lawsuit filed by the former client of an attorney. Id. at 961. In the underlying fraud case, the client claimed that the former attorney committed fraud by making certain representations to induce the client to settle an earlier lawsuit regarding foreclosure of the client's home. Id. In particular, the client alleged that Zamos told her that (1) he would continue to represent her to judgment (the foreclosure case), (2) would substitute in and represent her in a suit against her former attorneys (in a separate malpractice case), and that (3) he would have her house returned to her. Id. However, at two hearings held by the court in the foreclosure case the client "was told and agreed that she was releasing all claims to her house and that Zamos would not substitute into the malpractice lawsuit." Id. at 962. Further, at a third hearing in the case, on Zamos' motion to be relieved as counsel, "the trial court explained to [the client] that Zamos would be relieved as counsel and that [the client] would be responsible for bringing the default to judgment." Id. Further, "[w]hen the trial court asked [the client] whether `there [was] a problem' with relieving Zamos as counsel, [the client] responded, `No, not really'" and the client added that in her view Zamos was never her attorney of record. Id.

  After the filing of the fraud case, Zamos sent transcripts of the hearings in the foreclosure case to the client's new attorneys, which Zamos, contended proved the fraud claim had no merit. Id. at 962. Indeed, as discussed above, the transcripts of the hearings directly contradicted all of the fraud claims. Id. However, the new attorneys refused to dismiss the fraud lawsuit despite the receipt of the transcripts. Id. At trial on the fraud case, the trial court granted Zamos's motion for nonsuit, finding that no reasonable jury would find for the client. Id. at 963. Following judgment in the fraud case, Zamos filed a malicious prosecution action against the client and her new attorneys. Id. The new attorneys filed a joint anti-SLAPP motion which the trial court granted. Id. at 963-64. The Court of Appeal reversed the dismissal as to one of the defendants and found that an attorney who continues to prosecute a lawsuit after discovery of facts showing the lawsuit has no merit may be liable for malicious prosecution. Id. at 964. The California Supreme Court affirmed. Id.

  Here, unlike the facts in Zamos, the depositions of Lee and O'Hagan while offering evidence the Plaintiffs would certainly use to defend the lawsuits did not establish the claims lacked merit. At best, the testimony revealed conflicting testimony by Lee and O'Hagan. In addition, Zamos presented a unique case. Zamos was in essence a one witness case. The client's testimony regarding the representations made to her by Zamos was the basis of her fraud action. Zamos presents the rare situation where the only witness to a plaintiff's case makes a statement to a judge, on the record, that directly contradicts the plaintiff's allegations. Here, by contrast many witnesses and evidence were involved in Defendants' investigation and the filed complaints.

  c. Institution of the Underlying Action

  In addition to their argument that Defendants continuation of the underlying action after the Lee and O'Hagan depositions establishes a lack of probable cause, Plaintiffs argue that Defendants lacked probable cause when they initiated the underlying action. Opposition Br., p. 14. Plaintiffs argue that at the time the underlying action was filed the Attorney Defendants and Defendant O'Hagan possessed evidence that contradicted the conspiracy claim. Specifically, Plaintiffs argue that,

Defendants knew, at the time of the Comp-Optics transaction, that Stafford held a promissory note issued by AON for [sic] that was secured by all of AON's assets. If Stafford wanted to "loot" AON, he simply could have called the note and gained title to all of AON's assets without paying anything. That he released his security interest in the HPIC (and later in all of AON's other assets) and paid $400,000 for a subset of the assets he could have had for no additional money, defeat Defendants' claim that Stafford was trying to loot AON.
Opposition Br., p. 14. In support of this argument Plaintiffs point to evidence in the minutes of the AON Board. Plaintiffs contend that a simple review of the minutes by Defendants would reveal that Defendants' claims lacked merit. However, the Court has reviewed the minutes cited by Plaintiffs and that evidence, although in some places unfavorable to Defendants' case, does not establish that the underlying action was the most meritless of all meritless suits. Further, Defendants had evidence supporting their claims including O'Hagan's testimony that the HPIC technology could have been worth "millions" and Lee's testimony that the term sheet and the APA differed in important and material ways. In addition, the Comp-Optics Transaction involved an insider and was conducted under very short time limitations.

  Plaintiffs also argue that the evidence establishes that Defendants had no support for their allegation that $400,000 was an unfair price for the HPIC assets. Opposition Br., p. 16. In support of this argument, Plaintiffs point to Defendant O'Hagan's testimony that $50,000 to $100,000 was a reasonable price for the HPIC assets. However, as discussed above, O'Hagan's also testified that the technology might be worth millions.

  In addition, Plaintiffs argue that the evidence establishes that Defendants knew that HPIC did not constitute substantially all of AON's assets and that the allegation in the third amended complaint to that effect was without probable cause. Opposition Br., p. 17. Plaintiffs point to the fact that Metro Scout was the only commercial product AON had at the time of the Comp-Optics transaction. Plaintiffs also point to certain Board minutes showing that focusing on the HPIC assets would require a "revamping of the business." Opposition Br., p. 18. Further, Plaintiffs point to the fact that after the sale of the HPIC assets, in February 2003 AON sold the remainder of its assets to Interphotonics for $1 million. Id.

  However, the APA provided Stafford with a license agreement that permitted Comp-Optics to make use of a broad array of AON's intellectual property. Plaintiffs contend that the "option pursuant to which Stafford could purchase AON's remaining assets for $1,000.00 if they were not sold by June 2003 and a technology license" is a red hearing because "before they filed the Derivative Action, Defendants knew that this option was not exercised and they knew that the assets that were subject to the option were sold to Interphotonics in February 2003 for $1,000,000." Opposition Br., pp. 18-19. The Court disagrees. The license supports an argument that Stafford received access to all of AON's intellectual property — arguably "substantially all of AON's assets." Further, the fact that Interphotonics ultimately bought the remainder of the assets for $1 million dollars demonstrates that there was a wide variety of opinion as to the value of AON's assets. Interphotonics was willing to pay $1,000,000 for part of AON's assets, yet Stafford only offered to pay $1,000 for those same assets. Under any reading of those facts it is clear that there was a real dispute as to the value of AON's assets.

  Finally, Plaintiffs argue that no reasonable attorney would have relied on Defendants' sources of information. Opposition Br., p. 20. Plaintiffs contend that Sullivan, O'Hagan and Arlen Barksdale all had "self-interested reasons for saying that $400,000 was an unfair price for the HPIC assets." Opposition Br., p. 20. The Attorney Defendants argue that they relied on those individuals because each was a CDC Trust beneficiary and thus "the defacto clients of defendants." Weintraub Reply Br., p. 5. Mr. Weintraub also argues that he relied on Mr. Sahagan's email to Mr. Stafford where he wrote: "I think your Comp-Optics deal stinks." Id. at p. 5 n. 3. Each side argues and presents some evidence that many of the players involved in this set of transactions may have been beset by personal interests. However, the Court does not find that no reasonable lawyer would have relied on Sullivan, O'Hagan and Barksdale. Accordingly, this argument by Plaintiffs fails to show a lack of probable cause.

  In sum, the Court concludes that Plaintiffs have failed to meet their burden of showing that, based on the facts known to defendants, the underlying action was "the least meritorious of all meritless suits." Jarrow Formulas, 31 Cal. 4th at 743, fn. 13. Therefore, Plaintiffs have failed to establish the second element of their malicious prosecution claim.

  3. Malice

  The malice element of the malicious prosecution tort relates to the subjective intent or purpose with which the defendant acted in initiating the prior action. Sheldon Appel, 47 Cal. 3d at 874. Malice can exist, for example, where the proceedings are initiated for the purpose of forcing a settlement which has no relation to the merits of the claim. HMS Capital, 118 Cal.App.4th at 218. Further, "[a] lack of probable cause is a factor that may be considered in determining if the claim was prosecuted with malice [cit. omitted] but the lack of probable cause must be supplemented by other, additional evidence." Id. Because parties rarely admit an improper motive, "malice is usually proven by circumstantial evidence and inferences drawn from the evidence." Id. The defendant's motivation is a question of fact for the jury. Sheldon Appel, 47 Cal. 3d at 874. Here, the Court has determined that Plaintiffs failed to establish the elements of termination in their favor of the underlying action and a lack of probable cause. Accordingly, the Court does not reach the issue of malice.

  IV. Conclusion

  Having reviewed the papers submitted, the parties' oral arguments and the relevant law IT IS HEREBY ORDERED that Defendant Michael O'Hagan's special motion to strike [doc. no. 22] is GRANTED. IT IS FURTHER ORDERED that Defendant Timothy P. Dillon's special motion to strike [doc. no. 12] is GRANTED. IT IS FURTHER ORDERED that Defendants Weintraub Dillon, P.C. and Richard A. Weintraub's special motion to strike [doc. no. 17] is GRANTED.

  IT IS SO ORDERED.

20050902

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