The Truth Comes Out in the Medifast Litigation

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UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

Nearly a year ago, Medifast Inc. (NYSE:MED) filed suit against me and several others, for what it claimed was defamation of its Take Shape For Life division (TSFL). My client initiated an investigation of Medifast more than year prior to the filing of the lawsuit, and published several reports on the company. I was retained as a consultant to do a small bit of analysis. Some of my work was included in reports published by the client, parts of which were reproduced on this blog, along with some of my own analysis of Medifast and TSFL.

TSFL is a multi-level marketing company which peddles weight loss products. It entices new “health coaches” to invest in the system with claims of “healthy body, healthy mind, healthy finances.” I was critical of this business model, as I frequently am with MLMs.

And for daring to offer my opinion on Medifast and Take Shape for Life, I was sued for $270 million. From the start, I have characterized this lawsuit against me as a malicious prosecution. (Read the page I just linked to for the details.) Medifast has attempted to tarnish my professional reputation with false allegations, even in light of clear and convincing evidence of my innocence. Even after discovery was completed, and Medifast had in their possession evidence which clearly proves I did not do the things they have been alleging, the company has carried on with the charade and has continued to assault my character and integrity.

A few weeks ago, Medifast was finally forced to lay out their case against me, and the result was a clear: Medifast has no case against me.  Their case relies on two things they attempted to prove:

  1. That I defamed them by making false statements of fact.
  2. That I was a part of a conspiracy to trash the company to negatively impact their stock price.

The brief that Medifast filed failed to prove either of these things. It didn’t even come close.

Below is the response that I filed today in court, refuting the false claims that Medifast and TSFL made against me. The Medifast lawyers came up with 8 specific instances in which I supposedly defamed the company. The 8 items they identified are either:

  1. True (so there is no defamation and no case against me)
  2. Opinions protected by the First Amendment (so there is no defamation and no case against me)
  3. Statements I never made (so there is no defamation and no case against me)

Medifast never proved that I even knew about any alleged conspiracy, and certainly never proved that I agreed to be a part of any such conspiracy.

Medifast’s filing was heavy on untrue statements about me, and we demonstrate those lies clearly in our reply. Medifast and TSFL  relied on their untrue statements about me, and on lumping me into some “conspiracy,” to try to hold me accountable for the actions of others.  The plaintiffs have been unable to prove any of their allegations against me, and I eagerly await my day in court.

REPLY MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF TRACY COENEN AND SEQUENCE, INC.’S REVISED SPECIAL MOTION TO STRIKE PLAINTIFFS’ FIRST AMENDED COMPLAINT

I.Introduction

Tracy Coenen’s anti-SLAPP motion issued a straightforward challenge to Medifast:  You say she defamed the company.  Prove it.  The company did not respond with similar clarity.

The bulk of Medifast’s opposition is spent spinning a murky narrative.  It describes a network of nefarious saboteurs, at turns savvy and inept, bent on disgracing Medifast for personal profit.  The company relies on this story to impute liability against Coenen.  Where specific facts do not suit its purpose, it substitutes generalities.  When evidence is lacking, it relies on bare conclusions.  The effect is to accomplish more subtly Medifast’s intention, made explicit in the opening sentence of its brief, which boldly proclaims “The First Amendment has nothing to do with this case.”

Casual disregard of the Constitution is but the first sign that the company’s claims are not sturdy enough to withstand serious scrutiny.  Buried deep in the Opposition (page 43) you will find the barely beating heart of Medifast’s case against Coenen: Eight statements, paraphrased and stripped of context.  (Coenen did not even make two of the statements.)  There is no argument, only a brief evidentiary annotation.  In total, eleven lines of text.

The task now is to restore these statements to their full context, evaluate them from the point of view of a reader of Coenen’s blog, and ask two questions: Is this a provably false statement of fact about Medifast?  If so, is there clear and convincing evidence that Coenen either knew this statement was false, or doubted its truth before she published it?  In each case, the answer to both of these questions is “no.”  Medifast’s defamation claim fails.

So go the rest of the claims.  Medifast cannot bootstrap Coenen into liability as a coconspirator; the company fails to show that Coenen knew of Minkow’s alleged scheme to defame Medifast or that she intended to defame the company.  Medifast’s one-sentence argument for market manipulation ignores both the plain language of the statute and the California Supreme Court’s interpretation of it.  And the company makes only a passing mention of its claim for unfair business practices.

II. Reply

A.  Each of the Allegedly Defamatory Statements is Not Actionable

Some key principles guide the court’s analysis of the eight statements Medifast claims constitute defamation on Coenen’s part.  First, to be actionable, the statement must be false.  A true statement of fact is not defamatory.  Morningstar, Inc. v. Sup. Ct., 23 Cal.App.4th 676, 686 (Cal. Ct. App. 1994).  Merely making unflattering factual statements does not give rise to a cause of action for defamation.  Id.  And a statement is not false for defamation purposes if it is substantially true.  Masson v. New Yorker Magazine, 501 U.S. 496, 516-517 (1991).

Second, the statement must be provably false.  A statement that is too vague or subjective to be proven true or false is not actionable.  See Seelig v. Infinity Broadcasting Corp., 97 Cal.App.4th 798, 810 (Cal. Ct. App. 2002) and Roberts v. McAfee, Inc., 2010 U.S. Dist. LEXIS 20455, *31-32 (N.D. Cal. 2010).

Third, the statement viewed in its full context must convey a statement of fact, not opinion.  The fact that a statement standing alone could be construed as false is not sufficient to support a claim for defamation.  Monterey Plaza Hotel v. Hotel Employees & Restaurant Employees, 69 Cal.App.4th 1057, 1065 (Cal. Ct. App. 1999).  “What constitutes a statement of fact in one context may be treated as a statement of opinion in another, in light of the nature and content of the communication taken as a whole.”  Baker v. Los Angeles Herald Examiner, 42 Cal.3d 254, 260 (Cal. 1986) (citation omitted).

Where the context of a statement signals to readers that they are receiving the author’s opinion, courts construe statements as opinion that may otherwise be deemed fact. Id. at 260, 267-268 (reader expects opinion from Op-Ed pages and critical reviews).  See also Global Telemedia Int’l, Inc. v. Doe 1, 132 F.Supp.2d 1261, 1267 (C.D. Cal. 2001) (court looks at “the reasonable expectations of the audience” in analyzing context.).  In a setting where “the audience may anticipate efforts by the parties to persuade others to their positions by use of epithets, fiery rhetoric or hyperbole, language which generally might be considered as statements of fact may well assume the character of statements of opinion.”  Baker, 42 Cal.3d at 260.  “When the language used is ‘loose, figurative [and] hyperbolic,’ this tends to negate the impression that a statement contains an assertion of verifiable fact,” and the statement is not actionable.  Cochran v. NYP Holdings, Inc., 58 F.Supp.2d 1113, 1123 (C.D. Cal. 1998) (citing Milkovich v. Lorain Journal Co., 497 U.S. 1, 21 [1990]).

1.    The Statements Must Be Analyzed in the Context of Fraud Files

Each of the allegedly defamatory statements must be analyzed in the context of the forum in which they appeared: Coenen’s “Fraud Files” blog.[1] The header of Fraud Files explains that it is “daily commentary on fraud, scams, scandals, and court cases.”  The blog is a forum for opinion, commentary, and discussion; Coenen does not purport to break hard news on the site.  Coenen regularly employs feisty, hyperbolic language and fiery rhetoric to make her case.[2] The debate continues in the comment section, where Coenen and her readers challenge each other on various points raised in the main posts.  [E.g. Exh. GG.]  Readers perusing Fraud Files understand they are receiving Coenen’s opinion, and they know or quickly learn her slant: pro-consumer, anti-multilevel marketing.

2.   YTB Comparison

a. First statement[3]: “Ten levels of commission payouts – nine others get paid more than the seller.”

The post actually states:

1. Both Medifast (NYSE:MED) and YTB International have 10 levels of commission payouts.  That means on any given sale of actual products or services, the person selling it will receive a small commission, while 9 other levels will receive a total commission exceeding the seller’s commission.  [Compl. Exh. 13.]

The gist of this statement is that the nine upline participants collectively earn a greater percentage of the total commission than a bottom-level health coach that makes a product sale.  This statement does not convey a defamatory meaning and, thus, is not actionable.

Even if it did, Medifast’s evidence proves it is true.  When this statement was made, a health coach made a 15% commission; after July 2009, a health coach earns 20%, out of a total commission paid of approximately 50%.  [Bell Dec. ¶¶ 50, 61-63.]  Medifast’s evidence is focused on how health coaches earn a greater commission and bonus as they advance to higher levels (i.e., level six: “Executive Director”).  [Bell Dec. ¶¶ 59-65.]  This ignores the point of the statement: that the bottom-level health coach (level 1 out of 10), without any promotion, earns less than the nine levels above him collectively earn.

3.  “Conflict of interest for Medifast auditors?”

Medifast next identifies two statements from a post about FDI’s report questioning the independence of Medifast’s auditors: “That BJL Wealth Management recommended the purchase of Medifast stock to an operative of FDI” and “The recommendation of Medifast stock by its outside auditor may be considered a conflict of interest.”  The post actually states:

Last week Barry Minkow and Fraud Discovery Institute released a report regarding the independence of the auditors of Medifast Inc. (NYSE:MED). The company is audited by Bagell, Josephs, Levine & Company. The audit partner happens to also be a part of BJL Wealth Management, an investment firm with the same address as the audit firm.

This becomes interesting when you consider that BJL Wealth Mangement recommended the purchase of Medifast stock to an operative of FDI. Is this a conflict of interest? It may be. Does the audit partner, in his role at the investment firm, make recommendations regarding Medifast stock? Does he have any financial interest in transactions involving Medifast stock? If the answer to either of these questions is yes, then the audit partner would have compromised his independence.

An auditor working in the capacity of an investment advisor does not automatically give rise to independence issues. In fact, over the last ten years, the accounting powers that be were recommending that CPAs get involved in selling investments to generate additional revenue in their practices. However, when conducting an audit, the CPA has to draw a very clear line and not make recommendations regarding the buying or selling of securities of an audit client. The CPA also must not have any financial interest in the buying or selling of that stock. (i.e. He can’t receive any income from the sale of securities of an audit client, even if it was someone else in the investment firm making the sale or recommendation.)

Another interesting factoid uncovered by FDI … The PCAOB inspected six audits done by Bagell, Josephs, Levine, and found significant audit deficiencies in HALF of them. That’s a pretty bad hit rate.  [Compl. Exh. 17.]

a. Second Statement: That BJL Wealth Manager recommended the purchase of Medifast stock to an operative of FDI.

The average reader would not interpret the post as stating that Coenen herself claimed that BJL Wealth Management made the stock recommendation.  In context, the facts (the identity of the auditor and the wealth management firm, and the statement about the stock recommendation) refer to claims made in the FDI report, which the post immediately identifies as its source.  This is reinforced later in the post where Coenen refers to “[a]nother interesting factoid uncovered by FDI,” again clarifying that the facts came from the FDI report.  Coenen links to both the FDI report that was the source of the claim (Comp. Exh. 15) and Antar’s blog (Exh. HH), which restates FDI’s claim that BJL recommended Medifast stock.

Even if the statement could be attributed to Coenen, it is not actionable against her because she was merely republishing a statement made by FDI.  Barrett v. Rosenthal, 40 Cal.4th 33, 39 (Cal. 2006).  Coenen cannot be liable because she did not materially contribute to the illegality of this statement.  Phan v. Pham, 182 Cal.App.4th 323, 328 (Cal. Ct. App. 2010).

b. Third Statement: “The recommendation of Medifast stock by its outside auditor may be considered a conflict of interest.”

This statement cannot support a claim for defamation as a matter of law.  Whether a conflict of interest exists is an opinion, and does not imply an objective fact that can be provably true or false.  Savage v. Pac. Gas & Elec. Co., 21 Cal.App.4th 434, 445 (Cal. Ct. App. 1993).  But Coenen does not even state there is a conflict of interest; she poses a hypothetical about what would and would not be a conflict of interest, and concludes it is an open question based on the information presented in the FDI report.  [See Compl. Exh. 17.]

4.  “Medifast and Take Shape For Life: Weight loss pyramid scheme?”

The fourth, fifth and sixth statements are each paraphrased from a post titled “Medifast and Take Shape For Life: Weight loss pyramid scheme?”  While it is necessary to evaluate each statement in the context of the entire post, Coenen has included only excerpts due to page limits.

a. Fourth Statement: “Medifast requires minimum purchases to continue to qualify in the pyramid.”

The post actually states:

Why is multi-level marketing such a cash cow for the owners and executives of companies like these? Because product and service sales become largely irrelevant. The company instead markets the “opportunity” for making extra money and achieving financial freedom. (Almost no one is able to actually achieve either of these[4] when they sign up to sell MLM junk, but that’s beside the point. Get people to believe it’s possible, and you’re golden.) Recruit people into the MLM, require “minimum purchases” from each to continue to “qualify” in the pyramid, and you are likely going to have exponential growth for the company.  [Compl. Exh. 18.]

Medifast’s allegation misstates the content of the post.  Coenen does not state that Medifast requires minimum purchases; rather, the statement is made about multilevel marketing programs generally, many of which do require minimum purchases.

A reader would not interpret the claim, buried in the paragraph, to be a statement of fact about Medifast.  Coenen uses figurative and hyperbolic language to explain her opinion of why multilevel marketing programs in general are profitable.  She claims that products and services are “irrelevant,” uses quotation marks to convey skepticism for the business “opportunity,” and characterizes the products as “junk.”  All of this signals to the audience that they are receiving Coenen’s opinion about multilevel marketing programs in general, not facts about Medifast.

b. Fifth Statement: “Medifast does not make proper disclosures.”

The post actually states:

But maybe the MLM part of the company is so successful because it works so well for the “coaches” recruited into the program? We’ll never know for sure, as Medifast doesn’t disclose how much money the coaches are making, how much they spend on expenses of the business, what their attrition rates are, or how many recruits are actively selling or recruiting.  [Compl. Exh. 18.]

Medifast’s claim fails for several reasons.  First, Coenen did not state that “Medifast does not make proper disclosures.”  What Coenen did state was true: she identified information that, at the time, Medifast was not disclosing.  Second, “proper” appears nowhere in the post; even if it did, that would be a statement of Coenen’s opinion—whether or not something is “proper” is not a provably false statement of fact.  Roberts, 2010 U.S. Dist. LEXIS at *31-32 (statement that employee was fired for “improper” conduct too vague and subjective to be proven true or false.).  Indeed, Coenen made no statement regarding disclosure “requirements.”  The evidence cited by Medifast relates to whether the company was legally required to make these disclosures.[5] The post neither states nor implies that it was.  Her position has been consistent: that the disclosures would be helpful to consumers looking to evaluate TSFL as a business opportunity.

Medifast takes issue with Coenen’s criticism of the company’s lack of transparency about TSFL.[6] It then seeks to hold her accountable on pain of defamation for not knowing the information it was not disclosing.  Here the chaos is complete.  Coenen cannot be held accountable for not knowing information that the company was withholding.  Indeed, the great bulk of the evidence Medifast uses to support its claims for falsity—the data in the Bell declaration being the most glaring example—is information the company released for the first time when it filed its Opposition.

c. Sixth Statement: “TSFL makes it clear that to make real money, you have to recruit new people into the plan.”

The post actually states:

Take Shape For Life, however, makes it clear that to make real money, you have to recruit new people into the plan.[7] This is where the allegations of being a pyramid scheme come in. Like all other MLMs that I’ve looked at, the product or service isn’t really the focus. It’s simply the bait to get someone in and make the company look legitimate.[8] The real focus, however, is the recruiting of new marks into the scheme.  [Compl. Exh. 18.]

This statement is not actionable for several reasons.  First, the phrase “real money” is too vague and subjective to be capable of being proven true or false.  See Nygard, Inc. v. Uusi-Kerttula, 159 Cal.App.4th 1027, 1048-51 (Cal. Ct. App. 2008) and Roberts, supra, 2010 U.S. Dist. LEXIS at *31-32.  Second, the statement as a whole is marked by the type of loose, figurative language that signals it is Coenen’s opinion: the phrase “real money,” characterizing the products or services as “bait” to make the company look “legitimate,” and calling participants “marks” and multilevel marketing a “scheme.”

Reference to the post as a whole confirms that it is Coenen’s opinion.  The post uses TSFL to provide context for commentary on the economic realities of multilevel marketing programs.  Coenen discusses the financial lure of the business opportunity and how the programs rely on recruitment for continued success.  The paragraph in which the statement is made makes a larger point: multilevel marketing programs appear to be about product sales, while in reality the structure incentivizes recruiting.  This dichotomy between what is possible, on the one hand, and what is practical and probable, on the other, is central to Coenen’s (and FitzPatrick’s) critique of multilevel marketing programs.

Coenen highlights the difference between what is advertised and theoretically possible—significant income or success based on product sales alone—versus the reality of multilevel marketing: most people make little money and, from a practical standpoint, to make “real” money, you need to recruit people.[9] In its full context, the statement reflects Coenen’s opinion that in TSFL, like other multilevel marketing programs, it may be possible to make money through product sales alone, but the only practical way to make significant money is by recruiting participants.  Medifast relies on proprietary data—data it did not publish until filing its Opposition—to claim health coaches make money through sales, not recruiting.  This misses the point; Coenen’s opinion on the structure of TSFL’s structure was based on her analysis of the documents publicly available at the time.

Finally, the gist of the sixth statement is substantially true: participants have to move up the pyramid to make significant income.  Medifast’s own documents confirm this.  Coenen links to TSFL’s graphical compensation plan, which shows how the commission percentages increase as a participant moves up level-by-level.  Medifast’s current income disclosure statement illustrates how this works in practice: the bottom 80% earn a median monthly income of $78.97-$388.24,[10] the top 0.63% earn $16,751.52-$41,563.37.  [Exh. II.]  Thus, the statement is substantially true, and not actionable.  See Masson, 501 U.S. at 516-517.

5.  Medifast Identifies Two Statements that Coenen Did Not Make

Lastly, Medifast attributes two statements to Coenen that she did not make and points to no evidence to demonstrate the contrary: the seventh statement, “Almost no one makes a living wage in TSFL,” and eighth statement, “The bottom 50% of coaches are making all of the sales and not getting paid for their work.”

Even if Coenen made the seventh statement, it is both a statement of opinion and is too vague and subjective to be capable of being proven true or false.  See Nygard, Inc. 159 Cal. App. 4th at 1048-51.  How would “almost no one” be defined in this context?  What about “living wage”?  Id.  And Medifast can hardly claim this statement is false when the income disclosure statement shows that the bottom two levels, which account for 80% of active health coaches, make a median monthly income less than $400.  [Exh. II.]

As to the eighth statement, she mentioned the “bottom 50%” of coaches only once, when quoting FitzPatrick’s analysis in his January 2010 updated report, wherein he concluded that the bottom 50% of coaches received 6% of the total commissions.  [Compl. Exh. 24.]  The post does not state or imply what Medifast claims.  Even if it did, Coenen is immune from liability for republishing FitzPatrick’s analysis.  See Barrett, 40 Cal.4th at 39; Phan 182 Cal.App.4th at 328.

B.  Medifast is a Limited Purpose Public Figure

As a limited purpose public figure, Medifast must prove actual malice (knowledge of falsity or serious doubts as to falsity) by clear and convincing evidence.  Ampex Corp. v. Cargyle, 128 Cal.App.4th 1569, 1577-78 (Cal. Ct. App. 2005).  To avoid this burden, Medifast claims that it did not voluntarily inject itself into the debate; rather, it simply replied to the alleged defamation.  [Opp. 25:1-27:6.]  This myopic framing ignores the public dimension of Medifast’s promotion of TSFL as a viable business opportunity, and itself as a sound investment.  The company cannot expect to promote TSFL in the manner that it does and avoid any criticism.

Medifast’s attempt to claim it is not a limited public figure because there was no preexisting “public” controversy is an approach that has been soundly rejected.  See Gilbert v. Sykes, 147 Cal.App.4th 13, 24-26 (2007).  The relative merits of TSFL, and programs like it, has garnered attention and is the focus of widespread public interest.  Once an entity places itself in the spotlight on a topic of public interest, its conduct relating to that topic may be a fair target of criticism.  Id. at 19.  When publicly traded companies like Medifast engage in public controversies, as here, they are limited purpose public figures.  See, e.g., Ampex Corp. v. Cargyle, supra, 128 Cal.App.4th 1569, 1576-1578 (2005).[11]

In Gilbert, a plastic surgeon sued a former patient who created a website that related her negative experience with the surgeon.  Gilbert, supra, 147 Cal.App.4th at 19-20.  The court rejected the surgeon’s claim that he was not a public figure because there was no “preexisting public controversy” with the plaintiff.  This argument—the same that Medifast makes here—was “at war with the concept of a limited purpose public figure.”  Id. The court held the surgeon was the “archetypical example” of a limited purpose public figure: he touted the virtues of plastic surgery through television appearances, journal articles, and magazine pieces.  Id. at 25.  Once he placed himself into the public debate about a topic that concerns a substantial number of people, he became a public figure relating to that topic.  Id. at 25-26.

Such is the case here.  With TSFL, Medifast has voluntarily placed itself at the core of two substantial public debates: the country’s obesity epidemic and the personal finance crisis.  [Comp. ¶¶ 21-22, 37-39; Exhs. M, N, O, P, Q, R, CC, DD.]  Through its advertisements and websites, Medifast has made public claims not only about the quality of its weight-loss products, but also about TSFL—promoting it as a way to achieve not only a “healthy body,” but also a “healthy mind [and] healthy finances.”  [Compl. ¶ 22.]

Medifast invited public attention to itself and the TSFL program.  In periodic press releases announcing its financial results, Medifast touted TSFL’s success, and relied on the rapid growth of TSFL to project a positive financial outlook for the company as a whole.  [Exhs. M, O, R, CC.]  These reports convey to investors and consumers that Medifast is a sound investment, poised for future growth on the back of TSFL, which in turn is a sound business opportunity.  [Id. and Exhs. KK and LL.]  These claims predate FitzPatrick’s first report; indeed, FitzPatrick’s reports—and Coenen’s posts—involve dissecting those public claims made by the company.

This case is distinguishable from those cited by Medifast to support its claim that it was a private figure drawn into a public controversy.  Vegod and Maekoff support the general proposition that a business is not a public figure simply by virtue of advertising to the public.  See Makaeff v. Trump Univ., LLC, 2010 U.S. Dist. LEXIS 87112, *13 (S.D. Cal. 2010) and Vegod Corp. v. Am. Broad. Cos., 25 Cal.3d 763, 769 (Cal. 1979).  In each of those cases the allegedly defamatory statements were not directly related to claims made by the advertising.[12] Similarly, in Firestone, concerning a high-profile divorce, the plaintiff made no public claims about the health of her marriage prior to the press reports revealing details about the divorce settlement.  Time, Inc. v. Firestone, 424 U.S. 448 (1976).

By contrast, Medifast voluntarily injected itself into a public discussion by publishing claims about TSFL in several press releases promoting itself, and by forecasting future success based on the continued growth of the TSFL program.  It has widespread access to the media, as demonstrated by the scores of press releases, articles, profiles and advertisements about the company.  To allow Medifast to cloak itself as a private figure turns the public figure/private figure distinction on its head. See Wolston v. Reader’s Digest Ass’n, 443 U.S. 157, 164 (1979) (rationale for requiring public figures to prove actual malice: (1) voluntary exposure to criticism by attempting to influence public issue, and (2) capacity for “self-help” through media access).

The company became a public figure when it injected itself into public debate by making claims about its business model and the viability of TSFL as a means to achieve wealth and health.

C.   Medifast Failed to Produce Clear and Convincing Evidence of Actual Malice

In order to demonstrate “actual malice,” Medifast must produce clear and convincing evidence that Coenen made a defamatory statement knowing it was false, or with reckless disregard of its truth or falsity.  Ampex Corp., supra, 128 Cal.App.4th at 1578-79.  To meet this standard, the evidence must be sufficiently strong “as to command the unhesitating assent of every reasonable mind.”  Id. at 1579.  “Reckless disregard” is a purely subjective test, focused on the defendant’s attitude about the truth of the published material, not her attitude toward the plaintiff.  Reader’s Digest Ass’n v. Sup. Ct., 37 Cal.3d 244, 257 (Cal. 1984).  For actual malice, the test is not “whether a reasonably prudent man would have published, or would have investigated before publishing.”  St. Amant v. Thompson, 390 U.S. 727, 731 (1968).  Instead “[t]here must be evidence of actual doubt concerning the truth of the publication.”  Reader’s Digest Ass’n., 37 Cal.3d at 257.

Here, Medifast does not present any evidence to support its claims of malice.  Rather, it concludes Coenen acted with malice based on speculative, conclusory and/or incorrect statements.  Medifast presents only two arguments to support its claim that Coenen acted with actual malice.  First, it claims that Coenen failed to adequately review the TSFL compensation plan.  [Opp. 48:14-24.]  This is a blanket allegation; Medifast fails to link this claim to any of the eight statements in particular.

The contention is also false.  Coenen testified that she reviewed at least two versions of the compensation plan, though she could not specifically recall for how long or whether she reviewed the specific compensation plan placed in front of her during the deposition.  [Coenen Dep. 96:24-101:23.]  But even if Medifast’s claim was credited, it is insufficient to establish actual malice.  The company does not dispute that Coenen reviewed many documents in connection with her posts, including FitzPatrick’s reports (which analyze the compensation plan in detail) and Medifast’s publicly-filed documents.  In light of the investigation done by Coenen, the claim that she failed to pay enough attention to the compensation plan is insufficient to show actual malice.  See Reader’s Digest Ass’n, 37 Cal.3d at p. 258 (“failure to conduct a thorough and objective investigation, standing alone, does not prove actual malice…”)

Second, Medifast claims that Coenen posted about the potential conflict of interest with BJL recommending Medifast stock even though she did not believe it was a conflict, and failed to investigate the identity of the operative who told Minkow about the recommendation.  [Opp. 49:1-12.]  Once again, Medifast misstates the content of post.  Coenen outlines what would and would not constitute a conflict of interest under the scenario alleged by FDI, and states that more information is needed.  [Compl. Exh. 17.]  She never stated there was a conflict of interest.  This is consistent with the emails between Coenen and Minkow about BJL.[13] [Exh. EE.]

Finally, there is no evidence that Coenen believed the statement about the BJL stock recommendation was false, or even entertained serious doubts respecting its truth.  Medifast faults Coenen for not investigating the identity of the “FDI operative.”  Medifast’s principal argument (as to the Minkow defendants) surrounding the statement’s probable falsity is due to its source—Michael Lair.  But Coenen did not learn who Lair was, that he was the “operative,” or about his criminal record until after this lawsuit was filed.  [Dep. Coenen 178:6-180:7.]  Medifast does not claim otherwise.  Coenen republished the statement from the FDI report; Medifast presented no evidence that Coenen had reason to doubt the statement’s truth when she republished it.  The lack of investigation alone is insufficient to meet the “clear and convincing” evidence standard.  See Reader’s Digest Ass’n., 37 Cal.3d at 257.

Mere speculation is insufficient to meet Medifast’s burden of proof.  Despite its conjecture regarding Coenen’s allegedly malicious intent, Medifast failed to produce sufficient evidence to show that Coenen published any of the eight statements with actual malice.

D.  Medifast Cannot Prevail on its Claim for Conspiracy to Defame

Its direct defamation claims against Coenen lacking, Medifast tries to bootstrap Coenen into liability for the other defendants’ statements by alleging a conspiracy to defame.  “Because a civil conspiracy is so easy to allege,” Medifast bears a “weighty burden to prove it.”  Choate v. County of Orange, 86 Cal.App.4th 312, 334 (Cal. Ct. App. 2000).  “Conspiracies cannot be established by suspicions”; “[m]ere association does not make a conspiracy.”  Kidron v. Movie Acquisition Corp., 40 Cal.App.4th 1571, 1582 (Cal. Ct. App. 1995) (citation omitted).  To establish Coenen’s liability as a coconspirator, the company must show that Coenen (1) had actual knowledge of a plan to defame Medifast, (2) intentionally joined the plan, and (3) joined the plan for the purpose of harming Medifast.  Id.  Medifast’s principal failure of proof lies in the absence of evidence that Coenen agreed to be part of a conspiracy to defame the company.

As with its other claims against Coenen, the evidence presented is thin.  Medifast concludes there was a conspiracy based on Coenen’s participation in FDI’s Medifast investigation, specifically citing her work drafting the YTB comparison and providing feedback to Minkow and FitzPatrick on drafts of reports and releases.  [Opp. 51:1-7.]  This is insufficient.

Indeed, Coenen’s work supports the opposite conclusion: that she did not know of a scheme to defame Medifast and did not intend to defame the company.  First, the YTB comparison was not defamatory.[14] Medifast does not cite any evidence that Coenen knew anything written in the comparison was false.  As to FitzPatrick’s reports, she provided honest and pointed feedback, asking questions to clarify his arguments.  [Exh. JJ.]  When Coenen disagreed with the BJL investigation, she made her opinion known.  She told Minkow she “hated” the draft report, and that she thought it was “stupid.”  [Exh. EE.]  She forcefully made her argument on the issue of BJL’s independence.  Id.

Other than the YTB comparison, Medifast does not claim that Coenen played a responsible part in creating the allegedly defamatory statements made by her so-called co-conspirators—FitzPatrick, Lobdell or Minkow.

In sum, there is no evidence that Coenen knew of a scheme to defame Medifast.  But even if Coenen knew of such a scheme, Medifast has offered no evidence that she intended to join in the scheme to defame the company.  To the contrary, the evidence shows that Coenen took care to make accurate statements about the company, and to encourage the others to do the same, even vehemently expressing her disagreement.

E.  Medifast Failed to Prove a Probability of Prevailing on its Derivative Claims

Medifast does not dispute that its claims for market manipulation and unfair business practices fail if it cannot prove its primary claim of defamation.  See Blatty v. New York Times Co., 42 Cal.3d 1033, 1042 (Cal. 1986) (constitutional privilege applies to all claims whose gravamen is defamation).  Medifast pays only brief lip service to its unfair business practices claim.  Yet the company still claims that Coenen can be liable for market manipulation.

Medifast does not dispute that Coenen did not purchase or sell Medifast’s stock.  The sole basis for the company’s market manipulation claim is the company’s assertion that California Corporations Code section 25400(e) “extends liability to any person who is compensated by a stock manipulator for the dissemination of false statements.”  [Opp. 52:5-7.]  This is incorrect.

Subsection (e) makes it unlawful for any person to receive consideration “to induce the purchase or sale of a security by circulating information that the price of the stock may rise or fall because of market operations conducted for the purpose of raising or depressing the price.”  Diamond Multimedia Systems, Inc. v. Sup. Ct., 19 Cal.4th 1036, 1048 (Cal. 1999).  The subsection is directed at runners of “tipster sheets” who receive compensation from securities brokers.  StorMedia Inc. v. Sup. Ct., 20 Cal.4th 449, 460 (Cal. 1999).  See also Kamen v. Lindly, 94 Cal.App.4th 197, 203 (Cal. Ct. App. 2001) (discussing history of section 25400).

Medifast’s claim fails because Coenen did not act as a “tipster.”  She made no representation that Medifast’s stock would rise or fall.

III. Conclusion

For the reasons set forth above, this special motion to strike should be granted.


[1] Fraud Files is not focused on, or limited to, work that Coenen has done with Minkow.  Of the over 1,600 posts on the blog, 21 are directed at Medifast (including thirteen posts relating to this lawsuit).  Coenen has also posted over 1,000 times “Pink Truth” (formerly “Mary Kay Sucks).  [Rep. Dec. T. Coenen, ¶ 2.]

 

[2] See Exh. GG, “Amway Sucks!  Quixtar Sucks!  Alticor Sucks!”

[3] The statements discussed on pages 3-9 refer to the only statements that Medifast claims constitute defamation on Coenen’s part.  [Opp: 44: 12-24]

[4] Hotlink to http://www.sequenceinc.com/fraudfiles/2008/08/24/failure-rates-in-ytb-and-other-mlms/

[5] This statement has been a moving target.  Medifast originally claimed that Coenen defamed them by reference to “unknown and legally mandated disclosure requirements.”  [Compl. 13:23.]  Coenen never stated or implied that it was; Medifast now couches the statement as failure to make “proper” disclosures—a tacit admission that this claim lacks merit.

[6] Coenen is not the only one to take issue with Medifast’s previous disclosures.  On January 12, 2011, in response to “comments from the [SEC],” the company filed an amended annual report for 2009.  Among other things, the report was amended to provide information on the commission and bonus structure TSFL.  [Cp. Exh. NN, pp. 5-6 with Exh. OO, p. 5.]

[7] Hotlink to http://www.tsfl.com/pdfs/TSFL_CompensationPlan.pdf

[8] Hotlink to http://www.sequenceinc.com/fraudfiles/2008/07/02/can-you-make-money-with-mary-kay/

[9] This point is underscored by the link to a post about Mary Kay, where she talks about the difficulties of making money with that company through product sales alone.  [See fn. 7.]

[10] This excludes all health coaches earning $24 or less in monthly income, which would presumably lower the average figures for participants at the bottom of the pyramid.  [Exh. II.]

[11] See also Isuzu Motors Ltd. v. Consumers Union of United States, Inc., 66 F.Supp.2d 1117, 1120-21 (C.D. Cal. 1999) (company a public figure where it was an active participant in the market, made claims about the quality of its product, and the allegedly defamatory statements were related to the company’s public claims.).

[12] Also, Vegod and Makaeff dealt with companies in very different positions than Medifast – the former involved two relatively unknown corporations and the latter involved a small privately held company.  And, unlike Medifast, those companies did not seek the public’s attention other than in advertising services.

[13] In addition, Medifast does not argue that Coenen was involved in short selling stock – because she did not do so.  Instead, Medifast insinuates that Coenen’s posts were made to get publicity for her company and services.  There is no evidence to support this claim.  Regardless, it is not enough to prove malice.  Isuzu Motors Ltd., supra, 66 F. Supp.2d 1117 (goal of increasing profit through publicity materials is not sufficient to prove actual malice).

[14] See section II(A)(2), supra.

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