Case Name: Kenny Lai v. Piranha EMS, Inc., et al.
Case No.: 16-CV-296727

I. Background

This is an action arising out of a wage and hour dispute and prospective settlement thereof brought by plaintiff Kenny Lai (“Lai”) against defendants Piranha EMS, Inc. (“Piranha”) and its former Chief Executive Officer Roger Malmrose (“Malmrose”), among others. Lai was Piranha’s Chief Operating Officer (“COO”) and commenced this action to recover back pay and the value of his initial investment in the company. The cross-complaint Piranha and Malmrose filed in response is the subject of the pending special motion to strike.

Lai co-founded Piranha and served as its COO from February 2013 to February 2014. (Cross-Complaint, ¶ 7; see also Cross-Complaint, Exh. A.) When Lai ceased working for the company in 2014, the parties executed a settlement agreement of the claims he informally raised during his departure for wages owed and the value of his 2,666,666.67 shares of capital stock. (Cross-Complaint, Exh. A.) The settlement agreement apparently did not concern an existing lawsuit. (Walkup Decl., ¶ 3.)

The parties subsequently executed a settlement agreement in 2015, which is currently in dispute, as a novation of the 2014 settlement agreement. (Cross-Complaint, Exh. A; Walkup Decl., ¶ 4.) Pursuant thereto, Lai agreed to release his claims in exchange for $22,000.00 in back pay (inclusive of penalties and interest), $108,619.33 for the value of the shares he received upon his initial investment in the company (inclusive of taxes and fees), and a conditional payment of $350,000.00 upon the occurrence of a triggering financial event, such as the sale of Piranha, a shareholder distribution following an Initial Public Offering, or the existence of sufficient reserves to cover the payment without negatively impacting business operations. (Cross-Complaint, Exh. A.)

Lai commenced the underlying action because he claims Piranha never paid him his full salary of $200,000.00, which was the actual amount due under the 2015 settlement agreement. (Second Amended Complaint (“SAC”), ¶ 6.) Lai also alleges Piranha should have paid him $350,000.00 instead of shares in anyCOMM Corporation upon its purchase of Piranha’s fixed assets. (SAC, ¶ 30.) Lai alleges he received no cash payment despite there being a distribution to shareholders identified “as payment towards an unpaid labor obligation.” (SAC, ¶ 30.) To recover his $200,000.00 salary, Lai asserts 10 wage and hour claims against Piranha in the second amended complaint (“SAC”). Therein, Lai also asserts contract claims against Piranha, Malmrose, and anyCOMM Corporation in an effort to recover the $350,000.00 conditional payment.

In response, Piranha and Malmrose filed a cross-complaint in which they allege Lai violated the release of claims in the 2015 settlement agreement by commencing this action. (Cross-Complaint, ¶¶ 10-14.) They also allege Lai conspired with another shareholder, Brian Phan, to obtain and publish confidential and proprietary information about Piranha in violation of the Mutual Non-Disclosure Agreement Mr. Phan signed as a shareholder. (Cross-Complaint, Exh. B.) Additionally, they claim Lai falsely told others Piranha was “out of business.” (Cross-Complaint, ¶¶ 19-23.) On these bases, Piranha and Malmrose (“Cross-Complainants”) assert causes of action against Lai for: (1) breach of contract; (2) conspiracy to induce breach of shareholder non-disclosure agreement; (3) defamation and trade libel; and (4) declaratory relief.

Currently before the Court is Lai’s special motion to strike the cross-complaint pursuant to Code of Civil Procedure section 425.16. Cross-Complainants oppose the motion and request an award of monetary sanctions.

II. Standard of Review

Code of Civil Procedure section 425.16 authorizes a party to bring a special motion to strike a cause of action arising from his or her exercise of the constitutional right to speak freely and petition for redress of grievances. Courts evaluate special motions to strike using a two-step analysis. (Country Side Villas Homeowners Assn. v. Ivie (“Ivie”) (2011) 193 Cal.App.4th 1110, 1116.) First, the moving party bears the burden of showing the challenged causes of action arise from protected activity. (Id. at pp. 1116-17.) Second, if the moving party satisfies this initial burden, the burden shifts to the opposing party to demonstrate a probability of prevailing on the challenged claims. (Id. at p. 1117.) A court need not evaluate the opposing party’s probability of prevailing if the moving party fails to demonstrate the causes of action arise from protected activity in the first instance. (Ibid.) “Only a cause of action that satisfies both prongs of the anti-SLAPP statute — i.e., that arises from protected speech or petitioning and lacks even minimal merit — is a SLAPP, subject to being stricken under the statute.” (Navellier v. Sletten (2002) 29 Cal.4th 82, 89, original italics.)

III. Special Motion to Strike

A. Protected Activity

In order to arise from protected activity, a cause of action must be based on conduct that is “‘itself [ ] an act in furtherance of the right of petition or free speech.’” (Ivie, supra, 193 Cal.App.4th at p. 1117, quoting City of Cotati v. Cashman (2002) 29 Cal.4th 69, 78, original italics.) An act in furtherance of the right of petition or free speech includes written statements “made in connection with an issue under consideration or review by a [ ] judicial body . . . .” (Code Civ. Proc, § 425.16, subd. (e)(2).) Lai argues all of Cross-Complainants’ causes of action arise from protected conduct as defined in this particular provision because they are based on his commencement of the underlying action.

1. First Cause of Action

The first cause of action is for breach of the settlement agreement. Cross-Complainants allege Lai breached the 2015 agreement by commencing this action because he released all of his claims as part of the settlement. Lai argues the first cause of action is based on the protected act of filing the SAC.

Filing a complaint is an act in furtherance of the right of petition because a complaint is a written statement made in connection with a judicial proceeding. (Mundy v. Lenc (2012) 203 Cal.App.4th 1401, 1408-1409, citing Code Civ. Proc., § 425.16, subd. (e)(2); see also Navellier v. Sletten, supra, 29 Cal.4th at pp. 92-93.) Even so, a cause of action must be based on, and not simply asserted “in response to,” the protected conduct. (City of Cotati v. Cashman, supra, 29 Cal.4th at p. 77.) Thus, a cross-complaint does not arise from the protected activity of petitioning for redress simply because it is filed in response to the complaint. (Ibid.) Such an interpretation of section 425.16 would produce “absurd results.” (Ibid.) To the extent Lai generally attempts to shoehorn the first cause of action within the ambit of section 425.16 based solely on the fact it is asserted in a cross-complaint, his argument lacks merit.
Nevertheless, a claim that the institution of a lawsuit is a breach of the general release in a settlement agreement qualifies as a claim arising from the protected act of petitioning because the breach itself is the protected act of filing a complaint. (City of Cotati v. Cashman, supra, 29 Cal.4th at p. 77.) In the first cause of action, the breach itself is the filing of the SAC. Had Lai not commenced this action, there would be no breach because the first cause of action is based solely on breach of the release provision in the settlement agreement. The first cause of action thus arises from protected activity.

In opposition, Cross-Complainants characterize their claim as purely for breach of contract and thus beyond the scope of Code of Civil Procedure section 425.16. “The logical flaw in [Cross-Complainants]’ argument is [their] false dichotomy between actions that target ‘the formation or performance of contractual obligations’ and those that target ‘the exercise of the right of free speech.’ [Citations.]” (Navellier v. Sletten, supra, 29 Cal.4th at p. 92.) “A given action, or cause of action, may indeed target both.” (Ibid.)

Cross-Complainants cite City of Alhambra v. D’Ausilio (2011) 193 Cal.App.4th 1301 for the proposition that their claim is purely for breach of contract and does not arise from protected conduct. In that case, the Second District Court of Appeal held a declaratory relief claim determining whether a former union leader breached a settlement agreement when he participated in union negotiations in direct contravention of the agreement did not arise out of protected conduct. (City of Alhambra v. D’Ausilio (2011) 193 Cal.App.4th 1301, 1304.) In a subsequent decision, however, the Second District Court of Appeal explicitly held its decision in City of Alhambra v. D’Ausilio was inapplicable to claims for breach of the general release in a settlement agreement because it did not consider those specific circumstances in that case. (See Mundy v. Lenc, supra, 203 Cal.App.4th at p. 1409 [distinguishing City of Alhambra v. D’Ausilio].) City of Alhambra v. D’Ausilio thus does not apply to the case at bench, which involves breach of a release. Cross-Complainants’ position in opposition to the motion therefore is not persuasive. Lai therefore carries his initial burden with respect to the first cause of action.

2. Second Cause of Action

The second cause of action is for conspiracy to induce a shareholder to breach his mutual non-disclosure agreement. Lai argues this cause of action arises from protected conduct because the leaked information he received from shareholder Brian Phan caused him to file the SAC.

Lai does not present any evidence demonstrating he filed the SAC based on what he learned through the leak. While his declaration establishes the chronology of events leading up to the commencement of this action, he does not state he commenced the action because of or based on what he learned. (See Lai Decl., ¶¶ 8-9.) Additionally, even if Lai effectively argued or presented evidence to that effect, he does not show how the cause of action arises from protected conduct. The only apparent relationship between the second cause of action in the cross-complaint and the SAC is that the cross-complaint was filed chronologically and procedurally in response thereto. As stated above, this is insufficient for purposes of establishing whether a cause of action is subject to a special motion to strike. (See City of Cotati v. Cashman, supra, 29 Cal.4th at p. 77.) None of Lai’s arguments are meritorious. He therefore fails to demonstrate the second cause of action arises from protected activity.

3. Third Cause of Action

The third cause of action is for defamation and trade libel. Cross-Complainants allege Lai falsely spread the word that Piranha was out of business. As with the second cause of action, Lai attempts to tether the third cause of action to the filing of the SAC as a basis for subjecting the claim to a special motion to strike. Lai oddly argues that because he does not allege Piranha is out of business in the SAC and did not otherwise make any defamatory statements, the third cause of action must be based on his allegations about a transfer agreement in paragraph 52 of the SAC. Lai does not clearly explain his argument and it is not based on any authority or evidence. Lai provides no basis for concluding the third cause of action arises from his allegations about a transfer agreement in paragraph 52 of the SAC. This argument therefore lacks merit. As a result, Lai fails to demonstrate the third cause of action arises from protected conduct.

4. Fourth Cause of Action

The fourth cause of action is for declaratory relief. Cross-Complainants seek a declaratory judgment that Lai is not entitled to $350,000.00 because there has been no triggering event and Lai released all of his employment claims in the settlement agreement.

Lai argues that because the fourth cause of action contains allegations overlapping with the allegations in the SAC, the present controversy in the fourth cause of action is over “the SAC itself.” (Mem. of Pts. & Auth. at p. 10:10, 10:20-25.) The California Supreme Court has consistently rejected this line of argument. (See Navellier v. Sletten, supra, 29 Cal.4th at p. 98, citing City of Cotati v. Cashman, supra, 29 Cal.4th at pp. 76-78.) Claims asserted in a cross-complaint do not arise from the complaint itself simply because they arise out of the same controversy or underlying facts. (City of Cotati v. Cashman, supra, 29 Cal.4th at pp. 76-78; accord Navellier v. Sletten, supra, 29 Cal.4th at p. 98.)

Looking to the bases of Cross-Complainants’ fourth cause of action, Lai does not articulate and it is not obvious how a judicial determination of whether an event triggered the $350,000.00 payment arises from protected activity. As to the judicial determination of the scope of the release in the 2015 settlement agreement, Lai also fails to demonstrate how this component of the claim arises from the filing of the SAC. Unlike the breach of contract claim, the fourth cause of action is based solely on interpretation of the agreement not conduct within the ambit of the anti-SLAPP statute. Thus, even if the SAC brought an apparent controversy over the scope of the release to the attention of Cross-Complainants, Lai does not explain how the claim actually arose from the filing of the SAC or any other protected conduct.

While the claims asserted against Cross-Complainants are mentioned in the fourth cause of action, they are not mentioned in or as a component of the declaratory relief requested. (See Cross-Complaint, ¶ 26.) Lai does not argue or explain how the mere mention of protected activity subjects a cause of action not otherwise based on protected conduct to a special motion to strike. (Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP (2005) 133 Cal.App.4th 658, 672, citing Scott v. Metabolife Internat. Inc. (2004) 115 Cal.App.4th 404, 413-14.)

Finally, Lai cites cases establishing declaratory relief claims based on the filing of Proposition 65 intent-to-sue notices arise from protected activity. (CKE Restaurants, Inc. v. Moore (2008) 159 Cal.App.4th 262, 271; see also Equilon Enterprises v. Consumer Cause, Inc. (“Equilon”) (2002) 29 Cal.4th 53, 67.) Lai does not explain how these legal authorities, arising exclusively from Proposition 65 litigation, are analogous. (See, e.g., City of Alhambra v. D’Ausilio, supra, 193 Cal.App.4th at p. 1309 [distinguishing Equilon].) In contrast to the case at bench, the plaintiffs in the cited decisions quoted extensively from the Proposition 65 notices and sought to directly challenge the content and validity of the notices, going so far as to request that subsequent litigation be enjoined. (CKE Restaurants, Inc. v. Moore, supra, 159 Cal.App.4th at p. 271; see also Equilon, supra, 29 Cal.4th at p. 57.) Here, Lai argues the protected activity is the filing of the SAC. Cross-Complainants do not, however, request a declaration that the SAC is invalid or otherwise directly challenge the language or content of the pleading. These authorities thus do not justify Lai’s position. Lai therefore fails to carry his initial burden of demonstrating the fourth cause of action arises from protected activity.

5. Conclusion

Based on the foregoing, Lai carries his initial burden of demonstrating the first cause of action arises from protected conduct. He fails to carry his initial burden with respect to the second, third, and fourth causes of action because his argument that these claims arise from protected activity as cross-claims is incorrect as a matter of law. The burden thus shifts to Cross-Complainants to show a probability of prevailing on their first cause of action.

B. Probability of Prevailing

As to the first cause of action, Cross-Complainants must demonstrate they have “‘stated and substantiated a legally sufficient claim.’ [Citations.]” (Navellier v. Sletten, supra, 29 Cal.4th at p. 89.) In other words, Cross-Complainants must show “‘the [cross-]complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted [ ] is credited.’ [Citations.]” (Id. at p. 90.)

To satisfy this burden as to their breach of contract claim, Cross-Complainants must present evidence of the existence of a contract, their performance or excuse for nonperformance, Lai’s breach, and the damages they incurred as a result. (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.)

Cross-Complainants present the 2015 settlement agreement as well as Lai’s testimony that he both read the settlement agreement and had independent legal counsel throughout its negotiation and execution. (Walkup Decl., Exh. A; Snyder Decl., Exh. A.) Lai signed the settlement agreement on April 21, 2015 and agreed to release all claims against Cross-Complainants including, inter alia, claims for unpaid wages, violations of the Labor Code and California Wage Orders, and violations of the California Fair Employment and Housing Act. (Walkup Decl., Exh. A at pp. 5-6 [general and specific releases]; Snyder Decl., Exh. A.) In exchange, the settlement agreement reflects Lai received $22,000.00 for past wages and would receive $108,619.33 for his shares of stock. (Walkup Decl., Exh. A at p. 2 [unconditional settlement payments].) The settlement agreement also included a conditional payment of $350,000.00 to be paid only if Piranha had sufficient cash reserves or experienced a financial event, defined as distribution of cash to shareholders from an Initial Public Offering or sale of the company. (Walkup Decl., Exh. A at p. 3.) Cross-Complainants thus present evidence of the existence of the contract at issue.

Cross-Complainants also present Lai’s testimony that he received the $22,000.00 payment for wages due as reflected in the settlement agreement and that this amount was indeed for wages and not some other purpose. (Snyder Decl., Exh. A.) Lai also testified at his deposition that Piranha purchased his common stock from him for which he received a payment of $108,619.33 as required by the settlement agreement. (Snyder Decl., Exh. A.) Finally, Cross-Complainants’ evidence shows the conditions precedent to its payment of the separate $350,000.00 conditional payment have not occurred because it did not and does not have sufficient cash reserves to make the payment and no triggering financial event occurred. (Walkup Decl., ¶¶ 12-13.) Cross-Complainants thus present evidence showing they performed in compliance with the settlement agreement.

The SAC itself is evidence of Lai’s breach because, therein, he asserts claims he released when he executed the settlement agreement. This is sufficient evidence of Lai’s breach.

Finally, Cross-Complainants demonstrate they incurred damages as a result of Lai’s wrongful commencement of this action in the form of attorney’s fees incurred defending against claims he released. (Walkup Decl., ¶ 6; see also Walkup Decl., Exh. A at p. 8 [fee shifting provision]; see also Navellier v. Sletten (2003) 106 Cal.App.4th 763, 776-77 [settlement agreement must contain fee provision to recover attorney’s fees as damages for breach of release].)

Standing alone, Cross-Complainants’ evidence is sufficient to establish a prima facie claim for breach of contract. Lai argues in his motion, however, that Cross-Complainants cannot demonstrate a probability of prevailing on their claim because the settlement agreement is illegal under Labor Code section 206.5 and his waiver of this statutory protection in the settlement agreement is void. These are the only arguments presented by Lai with respect to the first cause of action. While Lai cites two sections of the Labor Code in support of his position, he does not cite any legal authority supporting his interpretation of these statutes.

Labor Code section 206.5 states: “An employer shall not require the execution of a release of a claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of those wages has been made.” The Legislature enacted this statute to prevent employers from coercing employees into signing general releases by withholding their pay until such time as they executed the release, not to prohibit releases of wage claims for which the employee already received payment. (Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796, 801-803.) Labor Code section 206.5 does not prohibit employers and employees from reaching a bona fide compromise of wage and hour claims. (Ibid.) Thus, Lai’s assertion that settlement agreements are categorically illegal lacks merit.

Lai also argues more specifically “the settlement agreement falsely states [he] was paid $22,000 for wages” and he “was actually due $200,000 for his agreed upon salary.” (Mem. of Pts. & Auth. at p. 11:19-20.) Lai does not point to any evidence in support of this assertion, cite any authority, or adequately explain his position. While he filed a declaration in support of his motion, he does not reference it in support of this argument. Even if he had, his declaration does not mirror the language of his argument. He states he did not receive “wages” but says nothing of whether he received the settlement payments or “was paid $22,000 for wages.” (Lai Decl., ¶ 5.) Given Lai refers to the $22,000.00 as a payment to compensate him for wages owed in both his deposition and his moving papers, the lone generic statement in his declaration, which he does not rely on or explain in making his argument, is not evidence Cross-Complainants failed to tender the $22,000.00 payment or the settlement agreement violates section 206.5. Lai’s argument therefore is unsubstantiated.

As to the issue of waiver, the settlement agreement states: “In light of the payment to LAI by PIRANHA of all wages due, LAI agrees that California Labor Code Section 206.5 is not applicable to PIRANHA and LAI.” (Walkup Decl., Exh. A at p. 7.) Lai characterizes this recitation as a waiver and states it is void because Labor Code section 219 prohibits such waivers. While section 219 states “no provision of this article [including section 206.5] can in any way be contravened or set aside by a private agreement, whether written, oral, or implied,” Lai cites no authority and does not explain how the recitation in the settlement agreement runs afoul of this prohibition. Moreover, the waiver is ultimately immaterial given Lai does not substantiate his argument with respect to the illegality of the settlement agreement in the first instance. Lai thus fails to substantiate his argument.

Lai does not raise any additional points in his motion. For the first time in his reply, Lai argues the allegations in the cross-complaint are too conclusory and attorney’s fees are costs not damages. He also offers new evidence including the 2014 settlement agreement. Courts do not consider points raised for the first time in a reply brief “‘because such consideration would deprive the respondent of an opportunity to counter the argument.’ [Citation.]” (Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764.) These belated arguments and evidence therefore will not be considered.

While the Court will not consider these new arguments, they are also unsubstantiated because he fails to present authority directly supporting them. For example, Lai cites Code of Civil Procedure section 1033.5 for the proposition that attorney’s fees may never be recovered as damages. While this statute lists attorney’s fees as an allowable cost, it does not prohibit their recovery as damages. (See, e.g., Brandt v. Superior Court (1985) 37 Cal.3d 813, 818-19 [discussing recovery of attorney’s fees as damages].) Additionally, the 2014 agreement is irrelevant. The SAC and the cross-complaint are based on the 2015 settlement agreement and Lai admitted, under oath, the 2015 settlement agreement was the operative agreement superseding the 2014 agreement. (Snyder Decl., Exh. A at p. 61:2-5.) Consideration of these new points therefore does not justify concluding Cross-Complainants’ claim lacks even minimal merit.

C. Conclusion

Lai carries his initial burden of demonstrating the first cause of action, but not the second, third, and fourth causes of action, arises from protected conduct. Cross-Complainants, however, present evidence sufficient to demonstrate their first cause of action is legally cognizable and substantiated. The special motion to strike the cross-complaint is therefore DENIED.

IV. Request for Attorney’s Fees

Cross-Complainants request an award of attorney’s fees in the amount of $5,100.00 pursuant to Code of Civil Procedure section 425.16, subdivision (c)(1), which states: “If the court finds that a special motion to strike is frivolous or is solely intended to cause unnecessary delay, the court shall award costs and reasonable attorney’s fees to the [opposing party] prevailing on the motion, pursuant to section 128.5.” Courts follow the procedural and substantive law applicable to sanctions awards made pursuant to Code of Civil Procedure section 128.5 in evaluating requests for attorney’s fees in connection with special motions to strike. (See Moore v. Shaw (2004) 116 Cal.App.4th 182, 199.)

Cross-Complainants argue Lai’s motion was frivolous because he failed to identify a single claim arising from protected conduct. A motion is only considered frivolous, however, if “‘any reasonable attorney would agree such motion [was] totally devoid of merit.’ [Citation.]” (Ibid.; see also Code Civ. Proc., § 128.5, subd. (b)(2) [defining frivolous].) Given the first cause of action is based on protected conduct, Cross-Complainants fail to establish the motion was frivolous. Cross-Complainants therefore are not entitled to an award of attorney’s fees and their request is DENIED.