Wednesday, March 12, 2008

Short-seller SLAPPs back

USANA Health Sciences, Inc. v. Minkow, 2008 WL 619287 (D. Utah)

Defendants used California’s anti-SLAPP statute to get rid of the state-law causes of action in this case, though a federal securities law claim remained. Minkow co-founded the Fraud Discovery Institute (FDI), which wrote a long, negative report about USANA and sent it to the SEC, the FBI, and the IRS. (USANA sells distributorships based on the sale of nutritional supplements and similar products.) Minkow short-sold USANA shares. FDI then published the report on its website and issued a press release, and continues to make follow-up statements using, among other things, internet banner ads and YouTube videos.

Under the anti-SLAPP statute, a defendant must make a prima facie showing that the cause of action is based on free speech or petitioning activity, at which point the burden shifts to the plaintiff to show a probability of prevailing. Here, most of the allegations stem from defendants’ public relations campaign of disparaging statements about USANA. Defendants’ conduct wasn’t illegal as a matter of law, nor was it exempted from the anti-SLAPP statute by section 425.17, which applies to statements about a defendant’s own product or a competitor’s business, goods, or services. Defendants weren’t competing with USANA. Thus, USANA needed to show competent, admissible evidence in support of its claims.

Under the Unfair Competition Law, USANA needed to show that members of the public were likely to be deceived by defendants’ statements or that defendants’ practices were unfair in that they created harm outweighing their benefits. However, USANA could only show the technical inaccuracy of a few statements. Defendants’ report says that an independent lab “‘found zero amounts of N-Acetyl L-Cysteine’” (an antioxidant) in a USANA product. The report stated “Not Detected” rather than “zero,” but the lab report itself was attached to defendants’ report, so without evidence of materiality and deceptiveness, there was no violation of the law. Likewise, USANA disputed the report’s comparison of the antioxidants in a serving of grape juice to those in a serving of USANA’s TenX bar, arguing that a gram-for-gram comparison was the only meaningful measure. But defendants’ report explains its measures. Fundamentally, the misstatements of which USANA complains were “hyper-technical statements representing differing interpretations of data, with no evidence tending to show how the statement[s were] material.”

Moreover, USANA’s complaint did not support its claim that the alleged misstatements caused its stock price to plummet. Rather, the sequence of events suggested that something else was behind at least some of the price declines, because they occurred before the market had time to digest defendants’ reports. Similar flaws doomed USANA’s other state claims, including intentional interference with economic relations and tortious exposure to litigation.

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