Court Opinion

ID: 9353151
Source: CourtListenerOpinion
Date Created: 2023-01-11 00:03:42.057004+00
Date Added: 2024-06-11T17:07:49.994433
License: Public Domain

Filed 1/10/23 Gradetech v. City of San Jose CA1/2
                  NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or
ordered published for purposes of rule 8.1115.

         IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FIRST APPELLATE DISTRICT

                                                   DIVISION TWO

 GRADETECH, INC.,
           Plaintiff and Appellant,
 v.                                                                     A165825
 CITY OF SAN JOSE,
                                                                        (Santa Clara County Super. Ct.
           Defendant and Respondent.                                     No. 18CV325319)

         Plaintiff Gradetech, Inc. (Gradetech) sued defendant City of San Jose
(City) in a single-count complaint alleging breach of contract. Gradetech’s
suit seeks to recover compensation for multiple cost overages arising from
Gradetech’s construction of a freestyle bike park. The City cross-complained,
asserting that Gradetech’s claims for cost overages were false claims within
the meaning of the False Claims Act (Gov. Code, §§ 12650 & 950 et seq.), and
certain municipal code sections. The City also asserted several breach of
contract causes of action and two claims for declaratory relief.
         Gradetech responded by filing a special motion to strike the entire
cross-complaint under Code of Civil Procedure section 425.16 (anti-SLAPP
statute). The trial court partially denied and partially granted the motion,

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and found it moot as to several causes of action the City withdrew. The trial
court also denied both parties’ motions for attorneys’ fees.
      Gradetech now appeals the partial denial of its anti-SLAPP motion, as
well as the denial of its motion for attorneys’ fees. It argues the trial court
erroneously found certain attorney demand letters it sent the City in advance
of its lawsuit were merely prerequisites to being compensated under the
terms of the contract; if the trial court had properly construed these letters,
Gradetech argues, it would have understood them to be protected speech
under the anti-SLAPP statute.
      We affirm in part and reverse and remand in part. The trial court
properly found the City’s breach of contract cross-claims arose out of
Gradetech’s performance of the contract, not the litigation process itself, and
thus those claims properly survived the anti-SLAPP motion. But the same is
not true of the City’s cross-claims arising out of Gradetech’s attorney demand
letters. Those letters were protected speech under the anti-SLAPP statute
because they were prepared and sent in contemplation of the litigation that
Gradetech filed shortly after sending them. We reverse the trial court’s order
denying the anti-SLAPP motion as to the claims arising out of the attorney
demand letters and remand for the trial court to determine whether the City
can prevail at the second step of the anti-SLAPP analysis by demonstrating
that its cross-claims predicated upon these letters possess the requisite
minimal merit to proceed. In light of our disposition, we vacate the trial
court’s ruling on attorneys’ fees.
                                BACKGROUND
   A. The Project
      The City and Gradetech executed a $2,208,300 contract (the Contract)
to construct the Lake Cunningham Bike Park Construction Project (the

                                        2
Project), effective March 28, 2016. The City’s briefing explains that this
Project called for “precision sculpting of hills, curves, grades, jumps, and
other park features.” The City further explains that these features require
precision construction because of the “physics” involved: these graded
features must “sequentially lead[] one into the other” in a particular fashion
in order to permit bike riders of different experience levels to safely navigate
the park and its features.
      The contract dispute underlying this case arose after Gradetech
incurred multiple cost and time overages in constructing the Project. The
City emphasizes that the Contract called for 215 days but the Project was not
completed for 540 days. The City offers that the delay and cost overages were
attributable to Gradetech’s lack of experience in designing bike parks.
Gradetech counters that the delay and cost overages it sustained were
attributable to significant “change in quantities” 1 of the movable earth
involved: according to its brief, a surveying company “concluded the Project’s
dirt jumps quantities more than doubled . . . .” As a result of this change in
volume, Gradetech contended it was entitled to additional compensation.
   B. The September and November Demand Letters and the
      Government Code Claim
      Gradetech expressed its view that it was entitled to additional
compensation, and that the conditions precedent in the Contract which
entitled it thereto were met,2 by means of several letters it sent the City
toward the end of 2017. We describe these letters in detail because they

      1 The Contract, subject to multiple conditions precedent, entitles
Gradetech to additional compensation when changes to the Project cause “a
significant change in quantities.”
      2   See footnote 7, post.

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comprise the “protected” activity Gradetech claims the City retaliated against
through its filing of its cross-complaint.
        On September 22, 2017, counsel for Gradetech sent the City a letter
notifying it of a potential claim for overages (September letter). Gradetech
sought $587,795.07 arising from “additional earthwork and grading
operations to change jump dirt grades that were already to grades shown on
the plans in the contract documents.” The total amount sought was
$587,795.07, consisting of $494,830.57 for “work”; $74,224.50 for “15%
markup”; and $18,740 for “survey, etc.” Gradetech emphasizes this letter
was sent by legal counsel and that it states: “This letter is prepared in
advance of potential litigation . . . .”
        Then, on November 15, 2017, Gradetech sent another letter to the City
(November letter). This letter repeated the same claim for $587,795.07 in
cost overage and sought additional compensation in the amounts of
$102,042.36, $131,132.94, $593,674, and $439,141.06. The November letter
likewise advised the City that it was sent “in advance of potential litigation.”
This letter also contained a certification made under penalty of perjury by
Gradetech’s president that he “thoroughly reviewed the attached claim . . .
and know[s] its contents, and said claim is made in good faith; the supporting
data is truthful and accurate; [and] that the amount requested accurately
reflects the contract adjustment for which the contractor believes the owner
is liable . . . .”3
        Finally, on January 23, 2018, Gradetech submitted a verified claim for
money damages against the City under Government Code section 905 et seq. 4

        We will hereafter refer to the September letter and the November
        3

letter collectively as the attorney demand letters.
        The California governmental liability statutes make all public entities
        4

in California liable in tort insofar as declared by statute. (3 Witkin, Cal.

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and San Jose Municipal Code sections 1.20.010 through 1.20.240
(Government Code claim). The Government Code claim was entitled “Notice
of Claim and Claim by Gradetech, Inc.” and was certified by Gradetech’s
president under the penalty of perjury, using the same language as in his
certification in the November letter. It stated that “[t]he claim concerns . . .
the contract balance for the work completed in connection with the
construction of Lake Cunningham Bike Park, as well as for increased
quantities on the project, potential change orders, the re-grading of jumps,
and right-of-way delay.” The 45-day statutory period for the City to respond
lapsed and thus the Government Code claim was rejected, in the City’s
words, “by operation of law.”5
   C. Gradetech’s Complaint
      Gradetech filed suit against the City on March 21, 2018, asserting a
single cause of action for breach of contract. It alleged that the
City did not compensate Gradetech for design changes that caused a
significant change in quantities of earth; for multiple City demanded re-
grading costs; for delays caused by the City; for assessing liquidated damages
for delays caused by the City; and for failing to pay the Contract balance.
The complaint sought compensatory damages, attorneys’ fees, and costs.

Procedure (6th ed. 2022) Actions, § 244.) “Liability is, however, subject to a
procedural condition precedent, i.e., the timely filing of a written claim in
proper form with the proper officer or body. (See [Gov. Code,] §§ 905,
905.2.).” (Ibid.) “[T]he purpose of these statutes is to provide the public
entity sufficient information to enable it to adequately investigate claims and
to settle them, if appropriate, without the expense of litigation . . . .” (Ibid.)
      5Government Code section 912.4, subdivision (a), provides in pertinent
part: “The board shall act on a claim . . . within 45 days after the claim has
been presented.”

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   D. The City’s Cross-complaint
      On January 31, 2020, the City requested leave to file a cross-complaint.
The trial court granted the City’s request, finding as follows: “The court
GRANTS the City’s motion for leave to file a cross-complaint. The allegations
made by the City seem logically related to the allegations in Gradetech’s
complaint, which makes the City’s proposed cross-claims compulsory.”
      The City duly filed its cross-complaint on June 18, 2020, and asserted
16 causes of action. Eleven claims asserted violations of the False Claims
Act,6 six of which arose from statements made in the attorney demand
letters, and five of which arose from statements made in the Government
Code claim. The City also asserted these latter five claims for payment
constituted violations of San Jose Municipal Code sections 1.20.010 through
1.20.240 for similar reasons.
      The cross-complaint also asserted three contract causes of action,
including breach of contract; breach of the implied covenant of good faith and
fair dealing; and breach of the implied duty to perform with reasonable care
(collectively, the breach of contract causes of action).
      Finally, the cross-complaint asserted two claims for declaratory relief:
cause of action No. 15 sought a declaration that Gradetech’s breach of
contract claim was an “impermissible cause of action,” and cause of action
No. 16 sought a declaration that Gradetech’s method of proving damages
failed for various reasons. The City sought compensatory damages of about
$500,000; treble damages and penalties under the False Claims Act; costs;
declaratory relief; and attorneys’ fees and costs.

      6 The False Claims Act creates civil liability for submitting false claims
to public entities. (See generally, 5 Witkin, Summary of Cal. Law (11th ed.
2022) Torts, § 884.)

                                         6
   E. Gradetech’s Anti-SLAPP Motion
      Gradetech responded to the City’s cross-complaint on August 28, 2020,
by filing a special motion to strike pursuant to Code of Civil Procedure
section 425.16. Gradetech argued that the City’s cross-claims arose directly
from protected speech made by means of the attorney demand letters and
Government Code claim, and that the cross-claims also lacked the requisite
minimal merit to proceed. (See Code Civ. Proc., § 425.16, subd. (b)(1) et seq.)
Gradetech sought attorneys’ fees under Code of Civil Procedure section
425.16, subdivision (c)(1).
      The City opposed the motion by arguing that Gradetech failed to meet
the anti-SLAPP test because none of the City’s causes of action arose from an
act in furtherance of the right to petition or free speech and because the
City’s causes of action have at least minimal merit. The City also opposed
Gradetech’s request for attorneys’ fees and sought attorneys’ fees itself.
   F. The Trial Court’s Ruling
      On December 15, 2020, the trial court granted the anti-SLAPP motion
in part, denied it in part, and found it moot in part.
      As to the first six causes of action alleging False Claims Act liability
arising from the attorney demand letters, the trial court rejected Gradetech’s
argument that such letters were sent in advance of potential litigation and
therefore protected under Code of Civil Procedure section 425.16. First,
relying on Kajima Engineering and Construction, Inc. v. City of Los Angeles
(2002) 95 Cal.App.4th 921 (Kajima), the trial court found that the attorney
demand letters “were merely the first submissions by Gradetech to attempt
to fulfill the requirements for claims for payment arising out of the parties’

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agreement as set forth in Section 9-1.07B of the Standard Specifications.”7
Because filing such submissions “is a prerequisite to making a Government

      7 Certain regulations promulgated by the City that are applicable to
public works projects, entitled “Standard Specifications,” were incorporated
by reference into the Contract. Section 9-107B of the Standard Specifications
governs completion and payment of the Project and provides, in pertinent
part:
             “If the work is deemed acceptable to the [City’s] Engineer in the
      Engineer’s sole discretion, after acceptance by the Engineer, the
      Engineer will make a proposed final estimate in writing of the total
      amount payable to the Contractor [Gradetech] . . . . Within 30 days
      after said proposed final estimate has been submitted to the
      Contractor, the Contractor shall submit to the Engineer written
      approval of said proposed final estimate or a written statement of all
      claims the Contractor has arising under or by virtue of the
      contract . . . .
            “On the Contractor’s approval, or if the Contractor files no claim
      within said period of 30 days, the Engineer will issue a final estimate in
      writing in accordance with the proposed final estimate submitted to the
      Contractor and within 30 days thereafter the City will pay the entire
      sum so found to be due. Such final estimate and payment thereon shall
      be conclusive and binding against both parties to the contract on all
      questions relating to the amount of work done and the compensation
      payable therefor . . . .
            “If the Contractor within said period of 30 days files claims, the
      Engineer will issue a semifinal estimate in accordance with the
      Proposed final estimate submitted to the Contractor and within 30 days
      thereafter the City will pay the sum so found to be due . . . .
           “The Engineer will make the final determination of any claims
      which remain in dispute after completion of claim review . . . .
            “Upon final determination of the claims, the Engineer shall then
      make and issue the Engineer’s final estimate in writing and within 30
      days thereafter the City will pay the entire sum, if any, found due
      thereon. Such final estimate shall be conclusive and binding against
      both parties to the contract on all questions relating to the amount of
      work done and the compensation payable therefor . . . .”

                                       8
Code claim or filing a lawsuit,” the trial court determined that Gradetech did
not have a “legally viable claim” when it sent the attorney demand letters
and thus, Gradetech could not have sent the letters in anticipation of
litigation. Under Bailey v. Brewer (2011) 197 Cal.App.4th 781, 789–790
(Bailey), this fact implied that the first prong of the anti-SLAPP statute was
not met.8
      Second, relying on Church of Scientology v. Wollersheim (1996) 42
Cal.App.4th 628, 651 (Wollersheim), the trial court found that because the
City’s cross-complaint was compulsory, it necessarily arose out of the same
“ ‘transaction, occurrence, or series of transactions or occurrences as the cause
of action which the plaintiff alleges in his complaint.’ ” In other words, the
trial court found the City’s cross-complaint was not targeting Gradetech’s
lawsuit (which would be protected speech; see post) but was instead targeting
Gradetech’s conduct that gave rise to lawsuit in the first place, i.e., “the bid,
contract and construction related to the subject construction project,” and the
allegedly fraudulent claims for payment predicated thereupon.
      The City withdrew its five False Claims Act causes of action arising
from the Government Code claim.9 The trial court therefore found the anti-
SLAPP motion moot as to the Government Code claim causes of action.

      8 As discussed more fully, post, a successful anti-SLAPP motion must
satisfy a two-prong test. First, the cross-defendant-movant must establish
that the claim it seeks to strike “aris[es] from any act of that person in
furtherance of the person’s right of petition or free speech under the United
States Constitution or the California Constitution in connection with a public
issue.” (Code Civ. Proc., § 425.16, subd. (b)(1).) If this prong is met, the
burden shifts to the plaintiff who must then demonstrate “a probability that
the plaintiff will prevail on the claim.” (Ibid.)
      9Gradetech’s briefing on appeal notes that although the City stated in
open court it was withdrawing these claims “with prejudice,” its actual filing
made to withdraw these claims, submitted several months later after this

                                        9
      As to the City’s three breach of contract causes of action (Nos. 12–14),
the trial court likewise held they arose out of Gradetech’s performance under
the Contract and not the litigation process itself. The trial court thus denied
the anti-SLAPP motion as to these causes of action because the first prong of
the anti-SLAPP statute was not met.
      However, the trial court granted Gradetech’s anti-SLAPP motion with
respect to the 15th and 16th causes of action seeking declaratory relief.
Specifically, the trial court found that the 15th and 16th causes of action for
declaratory relief were based on protected conduct “because they are based
entirely on the manner in which Gradetech asserts its claim in the
underlying complaint,” satisfying the first prong of the anti-SLAPP analysis.
The trial court then turned to the second prong, i.e., whether the City, now
carrying the burden of proof, could establish a probability of prevailing on the
merits as to these two claims. (Code Civ. Proc., § 425.16, subd. (b)(1).) The
trial court found against the City on this prong, concluding the declaratory
relief causes of action lacked “minimal merit” because the City’s briefing on
these points was conclusory and lacked analysis. The trial court struck the
15th and 16th causes of action as a SLAPP.
      The trial court then denied Gradetech’s request for attorneys’ fees and
costs, finding that its success in striking the final two causes of action did not
amount to receiving a “practical benefit” from bringing its anti-SLAPP
motion because “the bulk of the City’s claims remain.” The striking of the
City’s two claims for declaratory relief was of little import, the trial court
reasoned, and the “deletion” of the False Claims Act claims based on

appeal was filed, states that the claims were withdrawn “without prejudice.”
(We hereby grant Gradetech’s motion, dated November 23, 2021, to augment
the record on appeal pursuant to California Rules of Court, rule 8.155(a)(1).)
We discuss the discrepancy further, post, at pages 24–25.

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statements made in the Government Code claims would not “materially limit
discovery or affect the prospects of settlement.”
      Gradetech timely appealed. The City did not appeal.
                                 DISCUSSION
      In this appeal, Gradetech challenges the trial court’s denial of its anti-
SLAPP motion with respect the six cross-causes of action arising from the
attorney demand letters and the three breach of contract causes of action.
Gradetech further contends the trial court abused its discretion in denying its
motion for attorneys’ fees and costs.
                I. Standard of Review and Background Law
   A. Standard of Review
      We review a trial court’s ruling on an anti-SLAPP motion de novo.
(ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 999.)
   B. The Special Motion to Strike under the Anti-SLAPP Statute
      “An anti-SLAPP motion seeks to strike a ‘[s]trategic lawsuit against
public participation.’ ” (Wilson v. Cable News Network, Inc. (2019) 7 Cal.5th
871, 882, fn. 2.) Trial courts evaluate an anti-SLAPP motion in two steps. At
the first step, the court determines whether the moving party has established
“ ‘that the challenged allegations or claims “aris[e] from” protected activity’ ”
in which the moving party was engaged. (Id. at p. 884.)
      Code of Civil Procedure section 425.16, subdivision (e), establishes four
categories of protected activities, including the one on which Gradetech relies:
“any written or oral statement or writing made in connection with an issue
under consideration or review by a legislative, executive, or judicial body, or
any other official proceeding authorized by law.” (Code Civ. Proc., § 425.16,
subd. (e)(2), italics added.) Our Supreme Court has recognized that
“ ‘communications preparatory to or in anticipation of [litigation] . . . are

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equally entitled to the benefits of [Code of Civil Procedure] section 425.16,’ ”
subdivision (e)(2). (Briggs v. Eden Council for Hope & Opportunity (1999) 19
Cal.4th 1106, 1115; see also Flatley v. Mauro (2006) 39 Cal.4th 299, 321–
322.) Thus, “if a statement ‘concern[s] the subject of the dispute’ and is made
‘in anticipation of litigation “contemplated in good faith and under serious
consideration,” ’ [citations] then the statement may be petitioning activity
protected by [Code of Civil Procedure] section 425.16.” (Neville v. Chudacoff
(2008) 160 Cal.App.4th 1255, 1268; see also Bailey, supra, 197 Cal.App.4th at
pp. 789–790.)
       If the moving party successfully makes the showing required in step
one, then the burden shifts to the non-moving party at step two to show the
merit of the challenged cause of action by establishing a probability of
success. (Code Civ. Proc., § 425.16, subd. (b)(1); Wilson v. Cable News
Network, Inc., supra, 7 Cal.5th at p. 884.)
       Step two of the anti-SLAPP analysis requires the non-moving party to
“demonstrate that his or her claim has at least minimal merit, [otherwise]
the trial court should deem the cause of action a SLAPP and should strike it.”
(Laker v. Board of Trustees of California State University (2019) 32
Cal.App.5th 745, 760, italics added.) In making this determination, the court
does not resolve evidentiary conflicts, but determines whether the non-
moving party’s showing would be sufficient to sustain a favorable judgment if
accepted by the trier of fact. (Id. at p. 768.) The court considers the moving
party’s evidence only to determine if it defeats the non-moving plaintiff’s
showing as a matter of law. (Soukup v. Law Offices of Herbert Hafif (2006)
39 Cal.4th 260, 291.) We must “ ‘accept as true the evidence favorable to the
plaintiff . . . .’ ” (Ibid.)

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   C. The False Claims Act
      The California False Claims Act permits the recovery of civil penalties
and treble damages from any person who “[k]nowingly presents or causes to
be presented [to the state or any political subdivision] a false . . . claim for
payment or approval.” (Gov. Code, § 12651, subd. (a)(1).) A plaintiff must
allege that the person had actual knowledge of the falsity of the information,
acted in deliberate ignorance of its truth or falsity, and/or acted in reckless
disregard of its truth or falsity. (Id., § 12650, subd. (b)(2); see also Rothschild
v. Tyco Internat. (US), Inc. (2000) 83 Cal.App.4th 488, 494–495.) The false
statement or claim must also be material, which depends on “ ‘ “whether the
false statement has a natural tendency to influence agency action or is
capable of influencing agency action.” ’ ” (City of Pomona v. Superior Court
(2001) 89 Cal.App.4th 793, 802.)
   D. Relevant Contract Duties
      The elements for breach of contract are the existence of the contract,
performance or excuse for nonperformance, breach, and damages. (Oasis
West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820–821.) “ ‘Every
contract imposes upon each party a duty of good faith and fair dealing in its
performance and its enforcement.’ ” (Foley v. Interactive Data Corp. (1988)
47 Cal.3d 654, 683.) “ ‘ “Accompanying every contract is a common-law duty
to perform with care, skill, reasonable expedience, and faithfulness the thing
agreed to be done, and a negligent failure to observe any of these conditions is
a tort, as well as a breach of the contract.” ’ ” (Holguin v. Dish Network LLC
(2014) 229 Cal.App.4th 1310, 1324.)
                           II. The Anti-SLAPP Motion
      Gradetech contends the trial court misconstrued the attorney demand
letters as merely prerequisites to filing a claim for payment with the City

                                        13
because they were in fact bona fide first steps in initiating its lawsuit against
the City, protected by the anti-SLAPP statute. Gradetech next insists that
had the trial court reached the second step of the anti-SLAPP analysis, it
would have found the City’s False Claim Act claims arising from the attorney
demand letters to lack “minimal merit.” Gradetech repeats these arguments
with respect to the breach of contract causes of action, there citing a different
letter it sent the City prior to sending the attorney demand letters. Finally,
Gradetech contends attorneys’ fees were erroneously denied because its anti-
SLAPP motion in fact accomplished a “practical benefit” in its litigation
against the City.
      The central dispute between the parties is what the City’s cross-
complaint’s causes of action “arise from.” This debate can be clarified and
resolved through review of Kajima, as well as two subsequent California
Supreme Court decisions. We therefore review these decisions before
proceeding to analyze whether the trial court’s ruling was correct.
   A. “Arising From”
      In Kajima, a government contractor (Kajima) sued the City of Los
Angeles for breach of contract, alleging it had not been paid for work overages
it incurred on a government works project. (Kajima, supra, 95 Cal.App.4th at
pp. 924–925.) The city cross-claimed, alleging breach of contract and breach
of the implied covenant of good faith and fair dealing in connection with
Kajima’s bidding and work on the project. (Id. at p. 925.) The city later
amended its cross-complaint to add 19 additional causes of action against
Kajima and its two parent companies. (Ibid.) Kajima responded by filing a
special motion to strike the entire cross-complaint under the anti-SLAPP
statute, contending it was filed in retaliation for Kajima’s exercise of its First
Amendment right to petition for redress of grievances, i.e., for having filed

                                        14
the complaint against the city. (Kajima, at p. 925.) The trial court denied
the anti-SLAPP motion as to all causes of action except one: a claim that the
filing of the complaint itself was a violation of the False Claims Act. (Kajima,
at pp. 925–926.)
      A panel of the Second District Court of Appeal affirmed, concluding the
trial court did not err in denying the motion as to the other causes of action,
which targeted Kajima’s allegedly fraudulent conduct as to its bidding,
billing, and work processes. (Kajima, supra, 95 Cal.App.4th at pp. 929–930.)
The appellate court noted, “[i]t is only the 12th cause of action struck by the
trial court that mentions Kajima’s specific act in filing the underlying
complaint in this action.” (Id. at p. 930.) Because the City did not allege any
causes of action based upon Kajima’s filing of its lawsuit against the City—
except for the False Claims Act violation—the fact that its cross-complaint
may have been filed in retaliation for Kajima’s complaint was irrelevant to
the special motion to strike. (Kajima, at p. 929.) “Kajima wrongly focuses on
the City’s filing of the amended cross-complaint as a supposed act of
retaliation without demonstrating, as it must under the anti-SLAPP statute,
that the amended cross-complaint ‘alleges acts in furtherance of [Kajima’s]
right of petition or free speech . . . .’ ” (Ibid.) The appellate court explained it
is not sufficient to show that the challenged cross-complaint implicates or
involves the same transaction or subject matter as the complaint. (Id. at p.
933.) Rather, pursuant to the plain language of the anti-SLAPP statute
itself, the challenged complaint must have arisen out of the litigation process
itself. (Kajima, at p. 933.) Put differently: “We publish this opinion . . . to
emphasize that a cross-complaint or independent lawsuit filed in response to,
or in retaliation for, threatened or actual litigation is not subject to the anti-
SLAPP statute simply because it may be viewed as an oppressive litigation

                                        15
tactic. No lawsuit is properly subject to a special motion to strike under
[Code of Civil Procedure] section 425.16 unless its allegations arise from acts
in furtherance of the right of petition or free speech.” (Kajima, at p. 924,
italics added.)
      Shortly after Kajima was decided, our Supreme Court published a pair
of cases in which it examined in additional detail the “arising from”
requirement. We now turn to those cases. In City of Cotati v. Cashman
(2002) 29 Cal.4th 69 (City of Cotati), the city and some of the city’s property
owners had a dispute concerning whether a rent-control ordinance was
constitutional. (Id. at p. 72.) The owners sued the city in federal court,
seeking declaratory relief on the question. (Id. at pp. 72–73.) Later, the city
sued the owners in state court, also seeking declaratory relief on the question
but in what the city perceived to be a more favorable forum. (Ibid.) The
owners brought an anti-SLAPP motion against the city in the state court
action, and the trial court granted the motion. (Id. at pp. 72–73.) After the
appellate court reversed, the Supreme Court granted review and concluded
that the city’s state court action did not qualify as a SLAPP because it did not
satisfy the “arising from” requirement. (Id. at p. 79.) Rather, the city’s
lawsuit simply sought declaratory relief concerning the same underlying
controversy—the constitutionality of the city’s ordinance. (Id. at p. 80.) The
Supreme Court noted that the city’s complaint repeatedly referred to the
“underlying subject matter” of the prior federal action, i.e., the validity of the
ordinance, but contained “no reference to the action itself.” (Id. at p. 77.) It
cautioned that “[t]o construe ‘arising from’ in [Code of Civil Procedure]
section 425.16, subdivision (b)(1) as meaning ‘in response to,’ as [the anti-
SLAPP movants] have urged, would in effect render all cross-actions
potential SLAPP’s. We presume the Legislature did not intend such an

                                        16
absurd result.” (Ibid.) The court continued: “California courts rightly have
rejected the notion ‘that a lawsuit is adequately shown to be one “arising
from” an act in furtherance of the rights of petition or free speech as long as
suit was brought after the defendant engaged in such an act, whether or not
the purported basis for the suit is that act itself.’ ” (Ibid., italics added.)
      Next, in Navellier v. Sletten (2002) 29 Cal.4th 82 (Navellier), disputes
arose regarding the management of an investment fund. (Id. at p. 85.) The
original organizers of the fund sued an independent trustee of the fund in
federal court. (Ibid.) A settlement agreement was reached with regard to
one of the claims, and the independent trustee signed a release of his claims
in connection with the execution of the settlement agreement. (Id. at p. 86.)
The original organizers filed an amended complaint reflecting the partial
settlement of their claims, and the independent trustee responded by filing
counterclaims against the original organizers. (Ibid.) Relying on the release,
the original organizers successfully moved for summary judgment on several
of the counterclaims. (Id. at pp. 86–87.) The original organizers
subsequently sued the independent trustee in state court for fraud (“in
misrepresenting his intention to be bound by the Release”) and breach of
contract (“by filing counterclaims in the federal action”). (Id. at p. 87.)
Relying on the plain language of Code of Civil Procedure section 425.16, our
Supreme Court held that the state court action “arose from” protected
activity. (Navellier, at pp. 90–91.) In so holding, the court explained that the
“arising from” inquiry is not merely a function of determining whether “a
cause of action arguably may have been ‘triggered’ by protected activity . . . .”
(Id. at p. 89.) Instead, “the critical consideration is whether the cause of
action is based on the defendant’s protected free speech or petitioning
activity.” (Ibid.)

                                         17
   B. The Breach of Contract Causes of Action Do Not Arise from
      Protected Activity
      The cross-complaint’s 12th through 14th causes of action allege breach
of contract, breach of the implied covenant of good faith and fair dealing, and
breach of the implied duty to perform with reasonable care. The trial court
denied the anti-SLAPP motion as to these causes of action at the first step of
the anti-SLAPP analysis.
      Gradetech challenges the trial court’s ruling as to the breach of
contract causes of action by highlighting it submitted “a written Notice of
Potential Claim on September 1, 2016, just when the consultant commenced
his field fit and design changes.” The purpose of this notice, Gradetech
explains, was to notify the City it had performed “additional work beyond
Contract requirements for additional earthwork and grading operations to
change jump dirt grades that were already to grades shown on the plans in
the Contract Documents.” Gradetech concludes that this notice was an act of
protected speech which triggered the retaliatory SLAPP cross-complaint.
      Applying Kajima, City of Cotati, and Navellier to the facts of this case
readily yields the result that the trial court correctly ruled on the anti-SLAPP
motion with respect to the breach of contract causes of action.
      With respect to its contract claims, the cross-complaint alleged that
Gradetech refused to construct the bike park features in the precise sequence
required by the City’s bike park designer; refused to follow the City’s design
requests thereby causing multiple delays; failed to ensure the Project had a
competent superintendent at the site in violation of the Contract’s terms;
failed to maintain records to keep an inventory of soil on the site and how
much was used for each bike park feature as required by the Contract; either
untimely or never submitted its contractual claims or their supporting

                                      18
information; and performed unapproved extra work in violation of the
Contract and sought payment for it.
        As discussed, ante, our Supreme Court in Navellier has taught that to
determine what activity gave rise to a cross-complaint subject to an anti-
SLAPP motion, a court does not look merely to whether “a cause of action
arguably may have been ‘triggered’ by protected activity,” but instead, a court
examines what the “cause of action is based on.” (Navellier, supra, 29 Cal.4th
at p. 89, italics added.) Otherwise, finding protected speech whenever a
communication “triggers” a counter-claim risks “render[ing] all cross-actions
potential SLAPP’s,” a result our Supreme Court held in City of Cotati would
be “absurd.” (City of Cotati, supra, 29 Cal.4th at p. 77.) The breach of
contract causes of action are explicitly based upon Gradetech’s allegedly
deficient conduct that preceded and gave rise to its liability under the
Contract. Indeed, the breach of contract causes of action nowhere even
mention the “Notice of Potential Claim on September 1, 2016” that Gradetech
emphasizes comprise the protected activity which invited a SLAPP by the
City.
        Because allegedly failing to perform under a government works
contract is not a form of protected speech under the anti-SLAPP statute, the
trial court correctly denied Gradetech’s anti-SLAPP causes of action as to the
breach of contract causes of action.
   C. The Attorney Demand Letter Causes of Action Arise from
      Protected Activity
        The cross-complaint’s first through sixth causes of action allege that
Gradetech violated the False Claims Act when it sought compensation for its
deficient performance under the Contract by means of the attorney demand
letters. The trial court denied Gradetech’s anti-SLAPP motion as to these
cross-causes of action at step one of the anti-SLAPP analysis, finding they

                                        19
were not protected speech but merely the first step in the government claims
submission process.
      Gradetech contends this was error by arguing that the attorney
demand letters themselves are the acts the cross-complaint’s attorney
demand letter causes of action are based upon; that the relevant causes of
action explicitly target those letters; and that they were plainly sent in
anticipation of litigation. It argues that regardless of whether additional
contractual steps remained in order for them to sue under the Contract, the
Standard Specifications, and the Government Code, a lawsuit was inevitable;
and that the content of the attorney demand letters “went beyond the
‘submission of contractual claims for payment in the regular course of
business.’ ” Thus, Gradetech concludes, the City’s attorney demand letter
causes of action were a SLAPP.
      The City demurs, insisting that multiple steps remained pursuant to
the Contract and the City’s Standard Specifications before Gradetech could
commence suit, and because multiple steps remained, under Bailey, supra,
197 Cal.App.4th at page 790, “[Gradetech did not] have a good faith belief in
a legally viable claim.” Specifically, the City writes, “[b]ecause Gradetech
had not yet submitted the claims information required by Standard
Specifications sections 9-1.04 and 9-1.07B concerning any of the five items
described in Gradetech’s November letter, no legally viable claim existed
when the letters were written.”
      Bailey is inapposite here, and the City takes the phrase “legally viable
claim” out of context. In Bailey, a panel of the Second District Court of
Appeal examined whether pre-litigation cease and desist letters from the
party’s attorney were protected petitioning activity under the anti-SLAPP
statute. (Bailey, supra, 197 Cal.App.4th at p. 792.) The appellate court

                                       20
proceeded to hold that because the cease and desist letters “related to
proposed litigation barred by the doctrine of res judicata, such statements did
not relate to litigation ‘contemplated in good faith and under serious
consideration,’ ” reasoning that “no reasonable plaintiff could have believed in
good faith that the contemplated litigation was legally viable.” (Id. at
pp. 793, 795, italics added.) The appellate court emphasized that its holding
turned on whether the plaintiff’s claim was being brought in good faith: “The
question before us is whether Brewer’s statements of intent to litigate claims
previously resolved against him could have been contemplated in good faith.”
(Id. at p. 794.) But crucially, the appellate court explicitly limited its holding:
“In reaching this conclusion, we note that our ruling is a narrow one. It
applies only in cases where the proponent of the contemplated litigation has
been barred from relitigating the contemplated claims under the doctrine of
res judicata.” (Id. at p. 795.) The City makes no res judicata argument here,
and thus the narrow Bailey exception does not apply.
      The City also argues that reversing the trial court’s ruling as to the
attorney demand letter causes of action leads to unacceptable results. If
Gradetech’s interpretation of the anti-SLAPP statute were correct, the City
argues, a government contractor could immunize itself from False Claims Act
liability for fraudulent claims submissions simply by sending attorney
drafted letters prior to being sued by the governmental unit with whom it
contracted. To see why, this argument continues, assume that Gradetech in
fact failed to perform under the Contract. By sending the attorney demand
letters, it would insulate itself from False Claims Act liability because any
counterclaim predicated thereupon would be arising from its attorney drafted
letters, and not from its deficient conduct. It is unclear, the City’s argument

                                        21
concludes, how the City could ever defeat an anti-SLAPP motion if
Gradetech’s argument is taken to its logical conclusion.
      This argument fails to appreciate that we are reviewing only the first of
two showings that must be made for the City’s attorney demand letter causes
of action to be stricken as SLAPPs. True, we conclude that the attorney
demand letters are so closely connected to Gradetech’s lawsuit against the
City that they should not be construed to fall outside judicial petitioning
activity. (See Code Civ. Proc., § 425.16, subd. (e)(2).) But that does not mean
the City’s attorney demand letter causes of action are thereby stricken as a
SLAPP. Instead, the anti-SLAPP analysis merely moves to the second step
whereupon the City, now carrying the burden of proof, must demonstrate
that these causes of action possess “minimal merit.” (Navellier, supra,
29 Cal.4th at p. 93 [“[a]s our emerging anti-SLAPP jurisprudence makes
plain, the statute poses no obstacle to suits that possess minimal merit”].)
Indeed, the Navellier court appeared to rebut just such reductio ad absurdum
argument here advanced by the City: “[C]ontrary to the protestations of
plaintiffs’ counsel at oral argument, the anti-SLAPP statute neither
constitutes—nor enables courts to effect—any kind of ‘immunity’ for breach of
a release or of other types of contracts affecting speech. When a ‘ “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” ’ [citation], it is not subject to being stricken as a SLAPP.
In so providing, we have observed, the Legislature ‘weighed an appropriate
concern for the viability of meritorious claims against the concern “to
encourage participation in matters of public significance” ’ [citation].”
(Navellier, at pp. 93–94.)

                                        22
      Gradetech correctly emphasizes the attorney demand letters
conspicuously indicated they were being sent in advance of potential
litigation; they were each sent by an attorney and on law firm letterhead;
each letter began with the statement “[t]his law firm represents [Gradetech]
in connection with the City’s Lake Cunningham Bike Park”; and just two
months after the November letter, Gradetech served its Government Code
claim (the necessary next step for filing a lawsuit). Gradetech duly filed suit
less than two months after that. As to the City’s insistence that the Contract
and the Standard Specifications required multiple conditions precedent prior
to Gradetech being compensated under the Contract, “[t]he merits of [a
substantive claim] should play no part in the first step of the anti-SLAPP
analysis. [Citation.] The first step only determines whether [Code of Civil
Procedure] section 425.16’s procedural protection applies[.]” (City of Costa
Mesa v. D’Alessio Investments, LLC (2013) 214 Cal.App.4th 358, 371.)
      The Legislature expressly commanded that the scope of the anti-
SLAPP statute “shall be construed broadly.” (Code Civ. Proc., § 425.16,
subd. (a).) That mandate, together with the content, presentation, and
timing of the attorney demand letters, leads us to find they are sufficiently
connected to Gradetech’s lawsuit itself that they constitute protected speech
under the anti-SLAPP statute. The trial court therefore erroneously denied
Gradetech’s anti-SLAPP motion as to the attorney demand letter causes of
action at the first step of the anti-SLAPP analysis.10

      10 We observed, ante, that the trial court relied upon Wollersheim,
supra, 42 Cal.App.4th at page 651 as an independent basis for ruling that the
attorney demand letter causes of action were not SLAPPs because it had
earlier ruled that the City’s cross-complaint was “compulsory.” The City
makes this argument on appeal, instead citing Kajima, supra, 95 Cal.App.4th
at page 934, wherein Kajima invokes Wollersheim, at page 651 for the same
proposition, i.e., that “ ‘[a] compulsory cross-complaint on a “related cause of

                                       23
      The trial court did not reach the second step of the anti-SLAPP
analysis. Although we may do so in the first instance (see, e.g., Hecimovich v.
Encinal Sch. Parent Teacher Org. (2012) 203 Cal.App.4th 450, 468), we elect
not to do so here and express no view of whether the City’s claims possess the
requisite minimal merit to proceed. We likewise vacate the trial court’s
determination denying attorneys’ fees, leaving that issue for determination
after the trial court decides the anti-SLAPP second step.
      Finally, we return to the issue of the discrepancy between the City’s
representation to the trial court—that it would dismiss the five False Claims
Act causes of action arising from Gradetech’s Government Code claims with
prejudice—and its conduct in filing a dismissal without prejudice, months
after its contrary representation to the trial court. In its reply brief,
Gradetech requested for the first time that this court make adverse findings
against the City, and award Gradetech attorneys’ fees, because of what
Gradetech characterizes as the City’s duplicitous conduct in apparently
reserving the ability to refile these claims. At oral argument, Gradetech
clarified that it is merely requesting that this court take the City’s conduct
into account, including with respect to whether Gradetech should recover its

action” against the plaintiff (Code Civ. Proc., § 426.30, subd. (a)) would
rarely, if ever, qualify as a SLAPP suit arising from petition activity.’ ” We
recognize our determination with respect to the attorney demand letter
causes of action places this case among the “rarely, if ever” camp the
Wollersheim court stated would infrequently meet the first prong of the anti-
SLAPP statute. But Wollersheim articulated no rule barring compulsory
cross-complaints from qualifying as SLAPPs. To the extent it did, it would be
incorrect because “[t]he anti-SLAPP statute’s definitional focus is not the
form of the plaintiff’s cause of action but, rather, the defendant’s activity that
gives rise to his or her asserted liability—and whether that activity
constitutes protected speech or petitioning.” (Navellier, supra, 29 Cal.4th at
p. 92.)

                                        24
attorneys’ fees for litigating its anti-SLAPP motion. The City at argument
attributed the without-prejudice filing to a paperwork error. We believe that
these arguments are best directed to the trial court in the first instance,
which may consider them as part of the totality of circumstances in resolving
the attorneys’ fees determination.
                                DISPOSITION
      The trial court’s December 15, 2020 order is affirmed with respect to
causes of action Nos. 12, 13, and 14 of the City’s cross-complaint. The trial
court’s December 15, 2020 order is reversed with respect to the first through
sixth causes of action in the City’s cross-complaint. The trial court’s ruling on
attorneys’ fees is vacated. The matter is remanded for the trial court to
conduct further proceedings consistent with this opinion.
      Each party shall bear its own costs on appeal.

                                       25
                                          _________________________
                                          Van Aken, J.*

We concur:

_________________________
Richman, Acting P.J.

_________________________
Miller, J.

Gradetech, Inc. v. City of San Jose (A165825)

      * Judge of the San Francisco Superior Court, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.

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