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Medifast, Inc. v. Minkow

March 29, 2011

MEDIFAST, INC.; BRADLEY MACDONALD,
PLAINTIFFS,
v.
BARRY MINKOW; FRAUD DISCOVERY INSTITUTE, INC.; ROBERT L. FITZPATRICK; TRACY COENEN; SEQUENCE, INC.; WILLIAM LOBDELL; IBUSINESS REPORTING; ZEEYOURSELF, DEFENDANTS.



The opinion of the court was delivered by: Honorable Janis L. SammartinoUnited States District Judge

ORDER

ORDER: (1) GRANTING IN PART AND DENYING IN PART DEFENDANT ROBERT L. FITZPATRICK’S MOTION TO STRIKE; (2) GRANTING COENEN DEFENDANTS’ MOTION TO STRIKE; (3) GRANTING MINKOW DEFENDANTS’ MOTION TO STRIKE; (4) DENYING AS MOOT MINKOW DEFENDANTS’ MOTION TO DISMISS

Presently before the Court are three motions to strike Plaintiffs' complaint under California's anti-SLAPP statute, California Code of Civil Procedure section 425.16.*fn1 (Doc. Nos. 88, 97, 98.) Also before the Court are Plaintiffs' opposition (Doc. No. 105 (Opp'n)) and Defendants' respective replies. (Doc. Nos. 123 (FitzPatrick Reply), 124 (Coenen Reply), 125 (Minkow Reply)). Having considered the parties' arguments and the law, the Court GRANTS Defendants Coenen and Sequence, Inc.'s (collectively, Coenen's) motion; GRANTS Defendants Minkow, Fraud Discovery Institute, Inc. (FDI), William Lobdell, and iBusiness Reporting's (collectively, Minkow's) motion; and GRANTS IN PART and DENIES IN PART Defendant FitzPatrick's motion.

BACKGROUND

Plaintiff Medifast, Inc. is a publicly traded Delaware corporation with its principal place of business in Maryland. (Doc. No. 6 (FAC) ¶ 6.) Medifast produces, distributes, and sells "weight management and health management consumable products" under a variety of brand names, including Take Shape for Life (TSFL). (Id. ¶ 18.)

TSFL, a wholly owned subsidiary of Medifast, is a weight loss program and "integrated support system that helps people make the necessary changes in their lifestyles to create optimal health." (Id. ¶ 21.) TSFL combines the Medifast product line "with the support of health coaches and certified health advisors." (Id.) Medifast customers interested in becoming TSFL clients may do so by contacting a health coach through the Medifast website. (Id. ¶ 24.) Often, TSFL clients are referred to the program by other TSFL clients or health coaches. (Id. ¶ 25.)

Beyond a weight-loss program, TSFL "offers its clients an opportunity to increase their income if they choose to become a TSFL health coach." (Id. ¶ 26.) A TSFL client can become a health coach by purchasing "either the Application Pak or Career Builder Pak for a one-time cost of $199," executing an application, and passing a test. (Id. ¶¶ 26, 28.) Once certified, health coaches can sell Medifast products to others and recruit health coaches to join their teams. (Id. ¶ 29.) Health coaches are not required to purchase Medifast products with their own funds or hold inventory-all orders are shipped directly from Medifast to the end-user. (Id. ¶ 27.)

Health coaches earn commissions based on the amount of Medifast products they sell to other health coaches, non-TSFL clients, and their clients. (Id. ¶ 32.) Health coaches who recruit other health coaches to join their teams also earn residual commissions on sales of Medifast product by their recruits. (Id.)

Plaintiffs Medifast and Bradley MacDonald*fn2 (collectively, Plaintiffs) allege that Defendants engaged in a series of coordinated attacks on Medifast and the TSFL program designed to increase the value of a short position*fn3 Defendants held in Medifast stock. (See id. ¶ 40--45.) According to Plaintiffs, Defendants disseminated online press releases, reports, memoranda, videos, and other documents making defamatory statements regarding Medifast and the TSFL program. (See FAC¶¶ 46--96.) For example, Defendants allegedly stated that TSFL "operates as an endless chain or pyramid scheme" (id. ¶ 49.A); that "Medifast's reporting to its shareholders is false and misleading" (id. ¶ 49.B); that "Medifast is similar to Bernie Madoff's massive Ponzi scheme" (id. ¶ 50.B); that Medifast "is in violation of the laws of California and New York, as well as Federal securities laws (id. ¶ 55); that Medifast's outside auditor "was 'moonlighting as the company's stock promoter'" (id. ¶ 60); that "Medifast is merely a pump-and-dump scheme" (id. ¶ 69.C); that "Medifast is in violation of Federal Trade Commission regulations" (id. ¶ 79.A); and that "Medifast Executives are guilty of insider trading" (id. ¶ 79.C). According to Plaintiffs, Medifast's stock lost 45% of its value during the period of Defendants' attacks. (Id. ¶ 81.)

On February 17, 2010, Plaintiffs filed this action accusing Defendants of defamation, violation of Corporations Code section 25400, and violation of Business and Professions Code section 17200. (Doc. No. 1.) On February 19, 2010, Defendants allegedly "relaunched the attack on Medifast" and accused Plaintiffs "of 'using threat and intimidation designed solely to silence anyone from speaking critically about their business model.'" (FAC ¶ 83; see id. ¶ 86.) On April 12, 2010, Plaintiffs amended their complaint to add a claim for civil conspiracy to defame and allegations regarding Defendants' "post-filing attack." (FAC ¶¶83--88, 106--112.)

After Plaintiffs filed their FAC, Defendants moved to strike Plaintiff's complaint under California's anti-SLAPP statute. (Doc. Nos. 12, 19, 44.) On May 6, 2010, the Court granted Plaintiffs' motion to continue the briefing schedule and granted the parties ninety days in which to conduct discovery on four limited issues. (Doc. No. 46, at 9.) The Court further denied Defendants' motions to strike without prejudice and directed Defendants to refile their motions to strike after the close of the limited discovery period. (Id.) Following two extensions of the limited discovery period (Doc. Nos. 63, 83), Defendants refiled the instant motions to strike on November 9 and November 19, 2010. (Doc. Nos. 88, 97, 98.)

LEGAL STANDARD

Civil Procedure Code section 425.16 allows a defendant to gain early dismissal of causes of action aimed at chilling the valid exercise of the constitutional rights of freedom of speech and petition for redress of grievances. Cal. Civ. Proc. 425.16(a); Varian Med. Sys., Inc. v. Delfino, 106 P.3d 958, 966 (Cal. 2005). These meritless suits often are referred to as "strategic lawsuits against public participation" or "SLAPP" suits; hence section 425.16 is often referred to as the "anti-SLAPP statute." See Balzaga v. Fox News Network, LLC, 93 Cal. Rptr. 3d 782, 786 n.3 (Cal. Ct. App. 2009).

"A court considering a motion to strike under the anti-SLAPP statue must engage in a two-part inquiry." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1110 (9th Cir. 2003). First, the defendant must make an initial prima facie showing "that the challenged cause of action is one arising from protected activity." Navellier v. Sletten, 52 P.3d 703, 708 (Cal. 2002). "A defendant meets this burden by demonstrating that the act underlying the plaintiff's cause fits one of the categories spelled out in section 425.15, subdivision (e)." Id. (quoting Braun v. Chronicle Publ'g Co., 61 Cal. Rptr. 2d 58, 61 (Cal. Ct. App. 1997)) (internal quotation marks omitted).

Second, once the defendant has made a prima facie showing, the court "must then determine whether the plaintiff has demonstrated a probability of prevailing on the claim." Id. A plaintiff has a probability of prevailing if "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. Partker, Covert & Chidester, 50 P.3d 733, 739 (Cal. 2002) (quoting Matson v. Dvorak, 46 Cal. Rptr. 2d 880, 886 (Cal. Ct. App. 1995)) (internal quotation marks omitted). "The plaintiff's showing of facts must consist of evidence that would be admissible at trial." Hall v. Time Warner, Inc., 63 Cal. Rptr. 3d 798, 804 (Cal. Ct. App. 2007).

Only when a defendant shows that a claim is based on protected conduct and the plaintiff fails to show a likelihood of success on that claim is it subject to dismissal. Varian Med. Sys., 106 P.3d at 966.

ANALYSIS

Three groups of Defendants have filed motions to strike Plaintiffs' complaint under the anti-SLAPP statute. Plaintiffs concede that section 425.16(e)(3), which protects "any written or oral statement or writing made in a place open to the public or a public forum in connection with an issue of public interest," applies to Defendants' statements. (Opp'n 22.) Thus, the only question before the Court is "whether Plaintiffs have met their burden in establishing a probability of prevailing on their claims." (Id.)

1. Libel Per Se

Plaintiff's first claim alleges libel per se.*fn4 (FAC ¶¶ 97--105.) To prevail on a defamation claim under California law, a plaintiff must prove (1) a publication that is (2) false, (3) defamatory, and (4) unprivileged, and that (5) has a natural tendency to injure or that causes special damage.*fn5 Taus v. Loftus, 151 P.3d 1185, 1209 (Cal. 2007). Defamation may be effected by slander or, as in this case, libel. Cal. Civ. Code § 44. "Libel is a false and unprivileged publication by writing . . . which exposes any person to hatred, contempt, ridicule, or obloquy, or which causes him to be shunned or avoided, or which has a tendency to injure him in his occupation." Id. § 45.

A. MacDonald's Standing

In a defamation action, the First Amendment requires that the statement on which the claim is based "must specifically refer to, or be 'of and concerning,' the plaintiff in some way." Blatty v. N.Y. Times Co., 728 P.2d 1177, 1182 (Cal. 1986). According to Defendant Robert L. FitzParick (FitzPatrick) and Minkow, none of Defendants' statements can be reasonably interpreted as referring to MacDonald. (See, e.g., Doc. No. 88-1 (Mem. ISO FitzPatrick Mot.), at 19 n.5; Minkow Reply 3--4.)

Under California law, whether a statement can be reasonably interpreted as referring to a plaintiff is a question of law for the Court. SDV/ACCI, Inc. v. AT&T Corp., 522 F.3d 955, 959 (9th Cir. 2008) (citing Alszeh v. Home Box Office, 80 Cal. Rptr. 2d 16, 18 (Cal. Ct. App. 1998)). To proceed with his suit as an individual, MacDonald must show that (1) the Defendants' statements could reasonably be understood as referring to him as an individual and (2) some third party understood the statements in this way. Id. (citing, inter alia, Dewitt v. Wright, 57 Cal. 576, 578 (Cal. 1881)).

MacDonald fails to satisfy both requirements. Although Plaintiffs identify dozens of statements about Medifast and TSFL (FAC Exs. 1--31), only a few specifically refer to MacDonald or associate him with Medifast (e.g., Doc. Nos. 106--14 (Cohen Decl. ISO Opp'n), at Ex. 61, at 1, 6; id. Ex. 117, at 5, 9; id. Ex. 120). The statements that do mention MacDonald only do so in a limited context and are not defamatory. Specifically, they (1) relate allegations that MacDonald posted messages in support of Medifast on an internet message board (Cohen Decl. ISO Opp'n Ex. 61, at 1; id. Ex. 117, at 5 n.5), which were widely reported (Doc. Nos. 89--95 (Grell Decl. ISO FitzPatrick Mot.), at Exs. U, V); and (2) repeat MacDonald's public statements (Cohen Decl. ISO Opp'n 117, at 5 n.4; id. Ex. 120). The remainder of the statements, which do not mention MacDonald, simply cannot "reasonably be understood as referring to" MacDonald. SDV/ACCI, 522 F.3d at 959.

Further, the only evidence that third parties understood the statements as referring to MacDonald consists of postings on an internet message board disparaging MacDonald. (See FAC Exs. 28--29.) Plaintiffs ask the Court to infer from the content of the postings that they are based on Defendants' statements. (See Opp'n 32 ("These postings . . . are not only proof that Defendants' defamatory postings are reasonably capable of being understood as referring to Brad MacDonald-they were, in fact, so understood by third parties.").) However, none of these postings link to, quote from, or reference Defendants' statements.*fn6 At most, they use similar language. (See, e.g., FAC Ex. 28 ("Pimp-Daddy-Brad McDonald [sic] is a disgrace to our Armed Forces for running a Madoff Ponzi Scheme and ripping off good people.").) To conclude that the authors of these postings read Defendants' statements and understood them as referring to MacDonald would be pure speculation. See Hall, 63 Cal. Rptr. 3d at 804 (holding that plaintiff must oppose anti-SLAPP motion with evidence that would be admissible at trial).

Accordingly, the Court GRANTS Defendants' anti-SLAPP motions as to MacDonald.*fn7

B. Public Figure

Because a public figure must prove by clear and convincing evidence that the allegedly defamatory statement was made with "actual malice"-"that is, with knowledge that it was false or with reckless disregard of whether it was false or not"-another threshold issue is whether Medifast is a public figure. N.Y. Times Co. v. Sullivan, 376 U.S. 254, 279--80 (1964); see also Ampex Corp. v. Cargle, 27 Cal. Rptr. 3d 863, 870 (Cal. Ct. App. 2005) ("In the context of an anti-SLAPP suit, courts must consider the pertinent burden of proof in ascertaining whether the plaintiff has shown a probability of prevailing."). Defendants contend that Medifast meets this test (Coenen Reply 9--12; Doc. No. 98-1 (Mem. ISO Minkow Mot.), at 13; Mem. ISO FitzPatrick Mot. 21), but Medifast disagrees (Opp'n 23--30).

There are two types of public figures. "All purpose" public figures "occupy positions of such persuasive power and influence that they are deemed public figures for all purposes." Gertz v. Robert Welch, Inc., 418 U.S. 323, 345 (1974). In contrast, a "limited purpose" public figure has "voluntarily inject[ed] himself or is drawn into a particular public controversy and thereby becomes a public figure for a limited range of issues." Id. at 351. For the most part, those who attain public figure status "have assumed roles of especial prominence in the affairs of society." Id. at 345.

Defendants do not contend that Medifast has assumed a position of such pervasive power and influence that it should be deemed a public figure for all purposes. See id. The question, then, is whether Medifast has attained limited public figure status. Three elements must be met to characterize a plaintiff as a limited public figure:

First, there must be a public controversy, which means the issue was debated publicly and had foreseeable and substantial ramifications for nonparticipants. Second, the plaintiff must have undertaken some voluntary act through which he or she sought to influence resolution of the public issue. In this regard, it is sufficient that the plaintiff attempts to thrust him or herself into the public eye. And finally, the alleged defamation must be germane to the plaintiff's participation in the controversy.

Ampex, 27 Cal. Rptr. 3d at 870; accord Makaeff v. Trump Univ., LLC, 2010 WL 3341638, at *4 (S.D. Cal. Aug. 23, 2010) (Gonzalez, J.) (citing Gilbert v. Sykes, 53 Cal. Rptr. 3d 752, 762 (Cal. Ct. App. 2007)).

(1) Public Controversy

Coenen contends that Medifast has "voluntarily placed itself at the core of two substantial debates: the country's obesity epidemic and the personal finance crisis."*fn8 (Coenen Reply 10; see FitzPatrick Reply 8.) But the Court finds that neither of these ...


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