Liberty Synergistics, Inc. v. Microflo Ltd.

• Decision Date: 25 September 2014
• Docket Number: No. 11–CV–523 MKB.,11–CV–523 MKB.
• Citation: 50 F.Supp.3d 267
• Parties: LIBERTY SYNERGISTICS, INC., a California Corporation, Plaintiff, v. MICROFLO LTD., Edward Malkin, Ecotech Limited, a Cayman Islands Company, and Does 1 through 20, inclusive, Defendants.
• Court: U.S. District Court — Eastern District of New York

50 F.Supp.3d 267

LIBERTY SYNERGISTICS, INC., a California Corporation, Plaintiff
v.
MICROFLO LTD., Edward Malkin, Ecotech Limited, a Cayman Islands Company, and Does 1 through 20, inclusive, Defendants.

No. 11–CV–523 MKB.

United States District Court, E.D. New York.

Signed Sept. 25, 2014.

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Joanne J. Romero, Peter T. Shapiro, Lewis Brisbois Bisgaard & Smith LLP, New York, NY, Harold A. Ducote, Ducote & Associates, Costa Mesa, CA, Michael S. Winsten, Winsten Law Group, Mission Viejo, CA, Tracy Wolf, Lewis Brisbois Bisgaard & Smith LP, Dallas, TX, for Plaintiff.

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Eugenie F. Temmler, Rabner Allcorn Baumgart & Ben–Asher PC, Upper Montclair, NJ, Eric Bregman, Gilmartin & Bregman, Southampton, NY, for Defendants.

MEMORANDUM & ORDER

MARGO K. BRODIE, District Judge.

Plaintiff Liberty Synergistics, Inc. (“Liberty”) commenced the above-captioned action in California state court against Defendants Microflo Ltd. (“Microflo”), Edward Malkin, Ecotech Limited and certain unknown individuals, Does 1 through 20, alleging malicious prosecution of a prior litigation brought by Microflo against Liberty. (Docket Entry No. 1.) The action was removed to the Central District of California and later transferred to the Eastern District of New York by stipulation. (Docket Entry No. 15.) On August 16, 2011, Defendants filed an Amended Motion to Strike the Complaint (“motion to strike”) pursuant to California Code of Civil Procedure § 425.16, otherwise known as California's “anti-SLAPP” statute. (Docket Entry No. 34.) Defendants seek (1) to dismiss this action as a strategic lawsuit against public participation, or “SLAPP,” and (2) an award of sanctions against Plaintiff. (Id. ) By Amended Report and Recommendations (“R & R”) dated December 17, 2013, Magistrate Judge William D. Wall recommended that Defendants' motion to strike the Complaint be granted, and that the action be dismissed pursuant to California's anti-SLAPP statute. (R & R, Docket Entry No. 134.) Judge Wall further recommended that should the Court adopt the R & R, the parties “be given an opportunity to brief the application for sanctions.” (Id. at 1.) Plaintiff timely filed objections to the R & R, (Pl. Obj. to R & R (“Pl. Obj.”), Docket Entry No. 136), and Defendants filed a response to Plaintiff's objections, (Def. Mem. in Opp. (“Def. Resp.”), Docket Entry No. 137). For the reasons set forth below, the Court adopts in part, and rejects in part, Judge Wall's R & R. The Court adopts Judge Wall's R & R as to the determination that the issue of which substantive law applies to Plaintiff's malicious prosecution claim is the law of the case, but declines to adopt the portion of Judge Wall's R & R which found that Plaintiff does not have a reasonable probability of prevailing on its malicious prosecution claim. The Court also denies Defendants' motion for sanctions.

I. Background

a. The Underlying Litigation

On June 24, 2008, Microflo commenced an action in the Supreme Court of the State of New York, County of Nassau (“New York Supreme Court”), against Dan Foy, Julie Swink, Ronald N. Green, Ravi Krish, Rick Cole, Gary Green, Michael Tumis (a/k/a Mike Tumis), Walgreen Company (“Walgreen”) and Plaintiff, alleging fraud, unfair trade practices, unjust enrichment, breach of contract and breach of duty of good faith and fair dealing, tortious interference with prospective economic advantage, and violations of the Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. § 1961 et seq. (“RICO”) (the “Underlying Litigation”). Complaint, Microflo v. Liberty Bearing Corp., No. 08–011622 (N.Y.Sup.Ct. June 24, 2008).

According to the Underlying Litigation, Microflo sells “re-usable filters or non-disposable filters used in the processing of photographs” in one-hour photo labs.¹ Id. ¶ 54. Liberty's business “involve[d] the

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distribution and supply of chemistry, disposable filters and supplies to one hour photo labs.” Id. ¶ 59. In March 2004, Microflo contacted Walgreen in an effort to have Walgreen sell Microflo's filters. Id. ¶ 62. In April 2004, Michael Tumis, an employee of Walgreen, asked Microflo to provide samples of the filters to Walgreen for testing, which Microflo agreed to provide. Id. ¶ 64–65. After approximately sixty to ninety days of testing, Tumis advised Edward Malkin, Microflo's sole shareholder, that the “[f]ilters were acceptable, the price was okay and Walgreen would go ahead but that the [f]ilters would need to go through Liberty.” Id. ¶ 68.

At an August 23, 2004 meeting, Tumis and Malkin agreed to a price of $16.00 per filter, however, Tumis further instructed Malkin that the filters were to be sold by Microflo to Liberty, and then sold by Liberty to Walgreen. Id. ¶ 74. On or about August 27, 2004, Malkin met with representatives of Liberty regarding “what Liberty would need to do in connection with the roll out or distribution of the [f]ilters” to Walgreen. Id. ¶ 81. At the August 27, 2004 meeting, believing that Walgreen was proceeding with the purchase of Microflo's filters, Malkin answered inquiries from Liberty regarding the construction and composition of the filters, “thereby divulging to Liberty confidential trade secret information.” Id. ¶¶ 83–84. Liberty representatives also asked to be paid one-third of the gross receipts from the sales of the filters to Walgreen. Id. ¶ 87. Microflo objected to the price and by letter dated September 20, 2004, advised Walgreen that it was not interested in proceeding with the sale of the filters. Id. ¶¶ 89–92.

In October 2004, Tumis, on behalf of Walgreen, advised Malkin that Walgreen was interested in doing business directly with Microflo. Id. ¶ 94. In December 2004, Liberty expressed a willingness to conduct the sale and distribution of the filters between Microflo and Walgreen at a “reasonable price,” ultimately offering to conduct the sale and distribution at a 10% gross margin. Id. ¶ 102. In January 2005, Liberty and Microflo continued to discuss the sale. Id. ¶¶ 106–110. By email and a letter dated February 17, 2005, Liberty advised Microflo that while Liberty “had ‘not been idle on the matter of the contemplated arrangement between Liberty and Walgreens concerning the Microflo filters' ... ‘[it] had been unable to conclude an arrangement with Walgreens to supply Microflo Filters to Walgreens.’ ” Id. ¶ 115. The letter further stated that Liberty would thereby not be entering into a contract with Microflo for the purchase of the filters. Id. Microflo then contacted Walgreen and offered to provide the filters to Walgreen directly. Id. ¶ 116. Tumis informed Microflo that it had not yet decided on a final vendor for the filters and that the vendor “may or may not turn out to be Microflo.” Id. ¶ 117. In May 2006, Malkin learned that Liberty offered to sell Wal–Mart, “Microflo's largest single customer of many years standing,” washable, reusable filters for its photo processing machines. Id. ¶ 120.

Microflo asserted in the Underlying Litigation that, on information and belief, Liberty never intended to enter into an agreement for the purchase of Microflo's filters and that it used the samples Microflo provided to Walgreen, to “reverse engineer the [f]ilters so that Liberty could design and manufacture its own [f]ilters” to compete with Microflo.Id. ¶¶ 121, 123. In the Underlying Litigation, Microflo alleged among other causes of action, fraud, civil RICO violations and unfair trade practices.

After the Underlying Litigation was filed in the New York Supreme Court, it was subsequently removed to the Eastern District of New York. See Notice of Removal,

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Microflo, Ltd. v. Liberty Bearing Corp., No. 08–CV–3907, Docket Entry No. 1.² On March 19, 2010, Walgreen and Tumis (collectively the “Walgreens Defendants”) moved to dismiss the Complaint in the Underlying Litigation for failure to state a claim. See Underlying Litigation, Docket Entry No. 80. On March 24, 2010, Liberty and the Liberty employee defendants (collectively the “Liberty Defendants”) moved to dismiss the Underlying Litigation on jurisdictional grounds, and alternatively requested a change of venue. Id., Docket Entry No. 86. On May 11, 2010, the Honorable Leonard D. Wexler partially granted the Walgreens Defendants' motion to dismiss, dismissing the civil RICO claim with prejudice. Id., Order dated May 11, 2010. The Liberty Defendants' motion to dismiss was denied. Id. Pursuant to a stipulation of dismissal dated July 1, 2010, filed by Plaintiff and signed by the parties, the Underlying Litigation was dismissed with prejudice pursuant to Rule 41(a)(1)(A)(ii) of the Federal Rules of Civil Procedure.

b. History of the instant action

On September 17, 2010, Liberty commenced the above-captioned action in California state court alleging malicious prosecution against Defendants for bringing the Underlying Litigation. (Compl., annexed to Notice of Removal, Docket Entry No. 1, as Ex. A.) The action was removed to the Central District of California by the Defendants on the basis of diversity jurisdiction. (Docket...