October 3, 2013

Defamation in the world of commerce

Posted in Corporate Litigation, Employment Law by Gene Killian |

There’s an old, possibly apocryphal, story about Mark Twain’s wife. Apparently, Mr. Twain (er, Mr. Clemens) would become extremely upset with colleagues from time to time, and would write them vicious letters dripping with vitriol. He would then hand the letters to his wife and ask her to mail them. She would dutifully take the letters – and deposit them in a hidden drawer, where they were all found years later. Her wisdom and restraint probably saved Mr. Twain a lot of trouble.

In this day and age, in our litigious climate facilitated by the information superhighway, having Mrs. Twain around to protect your business would be a good thing.

That brings us to the recent New Jersey Appellate Division decision in NuWave v. Hyman Beck, an interesting case about defamation in the commercial world.   

Facts:  Backtrack Reports (official name: First Advantage Litigation Consulting, LLC) is an investigation firm that focuses on helping investors obtain background searches on potential investment partners. On its website, Backtrack says the following: “Why conduct investigative due diligence? Tune in to any media channel and you’ll find the answer in story after story about fallen financiers...The lesson in all these high profile blowups is clear and simple: No matter what you’re doing with your money, it’s essential to know the background and character of individuals and entities you’re doing business with or thinking of doing business with.”

No one can argue with that, right?  Well, unless the report about “background and character” happens to be incorrect.

Here, Backtrack prepared reports on the principals of an investment firm called NuWave, whose names were Buckner and Ryan. The reports contained a litany of not-so-good things about Buckner and Ryan, such as Buckner getting fired from a prior job; the two men stealing computer information from a prior employer, the firm of Hyman Beck; “fudging” NuWave’s performance data; doubling positions on an account without telling the customer; erasing the hard drive at Hyman Beck; trying to sabotage Hyman Beck’s computer system; being incompetent traders; and, generally, being rogues and malcontents.  Some or most of this stuff was, apparently, inaccurate. 

Despite the inaccuracies, Hyman Beck and its principals, Beck and DeFalco, apparently distributed the reports – or at least provided the information contained in the reports – in an effort to discredit their former colleagues and now-competitors. Buckner and Ryan were not amused, and filed suit against Backtrack, Hyman Beck, and Hyman Beck’s principals, Beck and DeFalco. The jury found Backtrack liable, and awarded over $1 million in presumed damages, and $1.4 million in actual damages. Backtrack appealed.  (Hyman Beck, Beck and DeFalco were able to escape liability based upon the one-year New Jersey statute of limitations for defamation claims, but Backtrack, for reasons that are unclear in the opinion, was not.)

Backtrack’s main defense to liability: The statements in the reports did not constitute “defamation,” because they were merely a “recap” of what Backtrack had been told by Hyman Beck. Backtrack also argued that because the reports were only furnished to a “limited audience” of sophisticated investors, “potential readers would not have accepted the statements as factual.”  (Huh?)

Wrong, said the Court.  The elements of a defamation claim are: (1) the assertion of a false and defamatory statement concerning another; (2) the unprivileged publication of that statement to a third party; and (3) fault amounting at least to negligence by the publisher.  According to the Court, “a defamatory statement, generally, is one that subjects an individual to contempt or ridicule, one that harms a person’s reputation by lowering the community’s estimation of him or by deterring others from wanting to associate or deal with him.”

Accusing a financial executive of thievery met the test:  “The statements imputed serious ethical, if not criminal, breaches.”  The Court found that Backtrack had an affirmative duty to confirm the accuracy of the statements before circulating them.

Perhaps the more interesting issue in this case related to damages. The jury awarded Buckner and Ryan both compensatory damages and presumed damages.  The actual (proven) damages of $1,406,000 were established by specific testimony regarding lost profits and costs attributable to Backtrack’s reports.  The presumed damages of $1 million were another matter, however. Presumed damages are a “procedural device” that permits a defamation plaintiff to obtain a damage award without proving actual harm to his or her reputation. Or, as the Court stated: “Where a plaintiff does not proffer evidence of actual damage to reputation, the doctrine of presumed damages permits him to survive a motion for summary judgment and to obtain nominal damages, thus vindicating his good name.”

In this case, though, the Appeals Court vacated the jury award, and remanded the case to the Trial Court for a hearing on damages, on the ground that Buckner and Ryan could not both have their proverbial cake and eat it too.  The Court stated:  “While an adequately instructed jury may make an award of presumed damages absent proof of actual harm to a plaintiff’s reputation, the award must be nominal. The policy undergirding the continued vitality of the doctrine of presumed damages, however, is completely served if the jury accepts proof of actual harm flowing from the defamation and makes an appropriate award of damages. In other words, a plaintiff’s good name is surely vindicated in those circumstances.” 

An important lesson to take away from this case is obvious: If your company’s marketing people are saying unflattering things about a competitor, you’d better be sure that the statements are accurate. As a side note, although we discuss insurance issues on our companion blog, it’s important to remember that if you get sued for defamation, you may have coverage for the suit, for example under “Coverage B” of your general liability policy (personal injury/advertising injury).  Give notice to your carrier early and often.

You can read the complete decision by clicking here.

-         Gene Killian