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Defamation Claims By Fired Employees

Wrongful discharge claims by fired employees often include causes of action for defamation in which the plaintiff alleges that the former employer published false statements to others regarding the reasons for the discharge.  In New York, these claims rarely succeed1 and courts routinely dismiss such claims based on the broad privilege defenses available to employers.  

Despite employers’ strong track record in defeating defamation claims, in two cases decided earlier this year, federal courts in New York ruled for plaintiffs on defamation claims against their former employers.  These decisions should serve as a “wake up call” reminding employers of the need to be vigilant in fashioning their policies and procedures to mitigate the risk of liability for defamation claims by employees.

On March 24, 2000, in Boyd v. Nationwide Mutual Insurance Co., 208 F.3d 406 (2d Cir. 2000) the Second Circuit reversed the dismissal of a slander claim by a recently terminated employee who alleged that his employer falsely reported to the police that he had stolen $3,760.  The Court refused to hold that the employer enjoyed a qualified privilege defense in the context of a Rule 12(b)(6) motion, finding that the complaint adequately alleged common law malice.  Specifically, the court found that the employee should be allowed to conduct discovery on the issue of good faith where the employer allegedly failed to consult business records in its exclusive possession that allegedly exonerated the plaintiff.

On February 18, 2000, in Acciardo v. Millennium Securities Corp., 83 F. Supp.2d 413 (S.D.N.Y. 2000) Judge Deborah Batts refused to vacate an arbitrator’s award of $40,535 in compensatory damages and $100,000 in punitive damages to a former employee against a broker-dealer. The award was based on the employer’s allegedly false statement on a “Form U-5” termination notice, a form that the National Association of Securities Dealers (“NASD”) requires its members to submit, as to the reason for plaintiff’s discharge.  The Court rejected the employer’s argument that the arbitration award should be set aside because statements on the U-5 were covered by an absolute privilege rather than a qualified privilege that could be defeated based upon evidence of malice.

In this column, we discuss the law of qualified privilege as a defense to employees’ defamation claims and analyze how these privileges were applied in the Boyd and Acciardo cases.  We also suggest that employers examine their employment policies and practices in order to identify and mitigate any risk of liability to employees based upon defamation claims.

Defense of Qualified Privilege
Under settled common law, a plaintiff establishes a prima facie case of defamation by showing (1) a defamatory statement of fact, (2) regarding the plaintiff, (3) communicated to a third party, and (4) causing injury to plaintiff’s reputation.2   However, a defendant can overcome this prima facie case by establishing a privilege defense.  

The defense of privilege fosters the fundamental public policy of encouraging employers to speak freely about their employees’ behavior and to report legal problems.3   New York courts have reasoned that the public interest supports shielding certain communications from litigation, even though possibly defamatory, as opposed to incurring the risk of stifling such communications altogether.4  

Employers have an absolute privilege with respect to statements made during or for a judicial or administrative proceeding.5  Similarly, there are several so-called “qualified privileges” available under New York law.  

For example, qualified privilege exists for statements “made by one person to another upon a subject in which both have an interest,”6 statements made pursuant to a duty,7 or statements constituting criticism of a public employee or official.8  Employers routinely invoke the qualified privilege where they make good-faith communications in aid of law enforcement.9  Similarly, employers’ statements regarding an employee’s dismissal or negative evaluations of employees have enjoyed a qualified privilege.10

Although these privilege defenses create a “safe harbor” in which employers can act without risk of defamation liability, employers seeking to rely upon the qualified privilege also must be aware that the privilege can be lost when a plaintiff demonstrates that the defendant acted with malice.11   In this context, malice means that the defendant made the alleged defamatory statements either out of spite or ill will or with a high degree of awareness of their probable falsity.12  A high degree of evidence has been required to prove that an employer abused his qualified privilege.13  

Boyd
The Second Circuit, in Boyd v. Nationwide Mutual Insurance Co., 208 F.3d 406 (2d Cir. 2000), recently examined the circumstances in which malice could be inferred from an employer’s alleged conduct that would defeat an employer’s claim of qualified privilege.  In Boyd, the Plaintiff-employee was fired by Nationwide Mutual Insurance Company (“Nationwide”) for allegedly stealing, receiving kickbacks and committing other financial improprieties.  Before he was dismissed, Boyd claimed that he was interrogated in a meeting with his supervisors and an internal investigator where he denied the allegations.  Boyd further alleged that Nationwide terminated Boyd’s employment and informed a New York state trooper that Boyd had stolen $3,760 from Nationwide by writing and cashing two checks for a single insurance claim.  Boyd alleged that the trooper charged him with third degree grand larceny in reliance on Nationwide’s representation, and that a local newspaper reported Boyd’s arrest.  

Boyd claimed, however, that had Nationwide investigated its own records, it would have seen that neither check had been cashed.  He claimed that ten days after his employment was terminated, the charges against him were dismissed.  

Boyd sued Nationwide in federal court based on diversity jurisdiction for, amongst other claims, defamation.  The district court dismissed Boyd’s claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

The Second Circuit reversed the district court’s dismissal of Boyd’s complaint and allowed him to proceed to discovery.  The Court held that an employer cannot use the qualified privilege to prevent a plaintiff in a defamation case from using the litigation process to seek evidence of the employer’s bad faith, where the employer controlled all relevant information, yet failed to consult it before making unfounded accusations.  The Court found that because Nationwide allegedly failed to avail itself of this exclusive information, it could not invoke the qualified privilege to obtain a dismissal of the plaintiff’s claim.

The Court acknowledged that a defendant’s failure to investigate alone does not permit a finding of malice, even if a prudent person would have investigated.  However, recognizing the difference between disposing of a case on a Rule 12(b)(6) motion and resolving the case later in the proceedings, the Court noted that a plaintiff may allege facts suggestive enough to warrant discovery, even where those facts alone would not support a cause of action for defamation.  Notably, the Second Circuit cautioned that the decision is a narrow one balancing the need to protect the ability of citizens to complain to the police with the cost that irresponsible and defamatory statements impose on individuals.  

Acciardo
The issue of when malice can overcome the defense of privilege also proved to be the pivotal issue in Acciardo v. Millennium Securities Corp., 83F. Supp.2d 413 (S.D.N.Y. 2000).  

In Acciardo, the Court considered the apparently conflicting decisions of New York’s state and federal courts on the issue of whether an employer’s false statements on a Form U-5 submitted by the employer to the NASD was subject to an absolute privilege or merely a qualified privilege that could be overcome with evidence of malice.  In holding that the arbitration panel had a sufficient basis to support a damages award to the former employee, the Court stated that a single New York Appellate Division ruling is not “necessarily controlling over a Second Circuit decision interpreting New York law.”  However, the Court expressed no view as to whether the New York Appellate Division or the Second Circuit decision was the correct interpretation of the law.14

In Acciardo, the plaintiff served as Director of Compliance at Millennium Securities Corporation and alleged that he was forced out of the firm for failing to “look the other way” or participate in regulatory frauds proposed by his employers.  As punishment, he claimed that his employers marked his Form U-5 with false and derogatory information, thereby preventing him from finding future employment.  Millennium asserted that the plaintiff’s Form U-5 was factually accurate and, even if not completely accurate, was not filed with malicious intent.  

The arbitration panel awarded the plaintiff $40,535 in compensatory damages plus pre-and post-judgment interest.  Additionally, it awarded $100,000 in punitive damages on a specific finding of malice.  The arbitrators further ordered Millennium to expunge the inaccurate information on the Form U-5 and change it to read that the plaintiff was terminated only for failure to perform duties.
On appeal, Millennium argued that the compensatory and punitive awards for defamation should be set aside because they were made in “manifest disregard” of New York State defamation law.  It contended that it had absolute immunity from statements made on a Form U-5, citing Herzfeld & Stern, Inc. v. Beck, 175 A.D.2d 689, 691, 572 N.Y.S.2d 683, 691 (1st Dep’t 1991) and Culver v. Merrill Lynch & Co., 1995 U.S. Dist. LEXIS 10017 (S.D.N.Y. July 17, 1995).  In Herzfeld, the First Department held that the New York Stock Exchange, and specifically its Department of Enforcement, clearly perform as a quasi-judicial body, and Form U-5 statements are absolutely privileged.15  At least one judge from the Southern District subsequently followed that rationale in Culver v. Merrill Lynch & Co., Inc.16

Conversely, the Plaintiff/Petitioner argued that Form U-5 statements enjoy only qualified immunity which can be overcome with a showing of actual malice, based on the Second Circuit’s holding in Fahnestock & Co., Inc. v. Waltman, 935 F.2d 512 (2d Cir. 1991), a case decided two months before the First Department decision in Herzfeld. There the Court held that the employer was not entitled to an absolute privilege when he amended an employee’s Form-U5 for the specific purpose of damaging the employee’s career.17  

While recognizing that the issue of qualified versus absolute immunity for these types of statements was contested, the Court noted that in recent years, courts in other circuits have overwhelmingly granted Form U-5 statements qualified rather than absolute immunity.  However, the Court concluded that due to the conflicting case law in New York the arbitration award should not be vacated because an arbitration award may be vacated only if the Court determined that the panel clearly knew of and ignored a governing legal principle.  Although Millennium argued that the Herzfeld rule should be controlling, the Court concluded that it was not a “governing legal principle” within the meaning of the manifest disregard doctrine.  Manifest disregard of the law requires that the error be “obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.”

Finally, the Court found that the panel clearly had authority to grant punitive damages.   The testimony suggested that Millennium engaged in repeated, malicious and vindictive misuse of its employees’ U-5 Forms, which had the effect of “blackballing.”  Thus, the Court held that the panel was within its authority to grant such a punitive damage award.  Although Millennium argued that the panel ignored its ability to pay before imposing punitive damages, the Court held that even if it did ignore Millennium’s financial standing, the error was not so obvious or egregious as to require overturning the award against three securities industry professionals and a securities business.  

Lessons of Boyd and Acciardo
The holdings in Boyd and Acciardo do not represent a trend towards eliminating the protection from defamation claims that employers have received under the law.  However, the outcomes in these two cases should serve to underscore the care which employers should exercise when dealing with information about employees that potentially could harm their reputations.

For example, in Boyd the Court held that the plaintiff’s allegation that the employer failed adequately to investigate plaintiff’s alleged theft supported the possibility that evidence could be uncovered in discovery to prove that the employer acted with the malice necessary to defeat the employer’s defense of qualified privilege.  It remains to be seen whether, on a motion for summary judgment or at trial, the employer can establish either that it did conduct an adequate investigation or that the investigation would not have revealed that its conclusions were incorrect.

Based on Boyd, employers may wish to reaffirm that their procedures for investigating employee misconduct include carrying out the investigation with the degree of thoroughness and care necessary to support the conclusion reached.  In particular, employers may wish to establish practices which encourage, to the extent possible, consideration of all material information within the employer’s exclusive control to the extent necessary to reach a reliable conclusion. Investigations which uncover only inconclusive or ambiguous evidence should be scrutinized carefully with the assistance of counsel before employees are dismissed or the allegations are reported to governmental authorities.  Such a practice should be applied, for example, to investigations of claims of sexual harassment, theft, or other instances of employee misconduct.18

Similarly, Acciardo highlights the need for employers to exercise reasonable care in stating the reasons for employee dismissals in Form U-5s.  Obviously such communications should not be used as an opportunity to “get back” at the employee, as the arbitration panel in Acciardo concluded.  Moreover, employers should institute procedures to ensure that whatever is stated in such forms is supported by a reasonable basis.  

For similar reasons, employers also should consider formulating an appropriately tailored procedure for responding to inquiries from prospective employers as to the reasons for an employee’s dismissal or as to the former employee’s job qualifications.  In order to avoid the possibility of defamation claims, employers often institute procedures limiting the information that they will provide to prospective employers to the employee’s dates of employment, positions held and final salary.  Alternatively, with respect to problematic dismissals, if the employer makes any statement whatsoever, the employer may wish first to get the employee’s agreement to the exact wording to be used in such a statement.  This is often accomplished by way of a separation agreement with the employee as part of the consideration for a general release of claims.
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1.  See, e.g., D’Avino v. Trachtenburg, 149 A.D.2d 401, 539 N.Y.S.2d 755 (2d Dep’t 1989) appeal denied, 74 N.Y.2d 611, 545 N.E.2d 870, 546 N.Y.S.2d 556 (1989); Davis v. Independent Transporters of the Handicapped, Inc., 226 A.D.2d 496, 641 N.Y.S.2d 114 (2d Dep’t 1996); Herlihy v. Metropolitan Museum of Art, 214A.D.2d 250, 633 N.Y.S.2d 106 (1st Dep’t 1995); Canino v. Barclay’s Bank, 1999 U.S. App. LEXIS 3834 (2d Cir. March 11, 1999).  
2.  See Murphy v. Cadillac Rubber & Plastics, Inc., 946 F. Supp. 1108, 1121 (W.D.N.Y. 1996).
3.  See Liberman v. Gelstein, 80 N.Y.2d 429, 437, 605 N.E.2d 344, 349, 590 N.Y.S.2d 857, 862 (1992).  
4.  See Id.
5.  See Missic v. Big V Supermarkets, Inc., 115 A.D.2d 808, 811, 495 N.Y.S. 2d 994, 997 (3d Dep’t 1985), appeal dismissed, 67 N.Y.2d 938, 493 N.E.2d 944502, N.Y.S.2d 1028 (1986).
6.   McDowell v. Dart, 201 A.D.2d 895, 895, 607 N.Y.S.2d 755, 756 (4th Dep’t 1994) (holding that statements made by an employer to an employee are communications in which both have an interest).
7.  Kasachkoff v. City of New York, 107 A.D.2d 130, 134, 485 N.Y.S.2d 922, 995 (1st Dep’t 1985), appeal dismissed, 65 N.Y.2d 722, 481 N.E.2d 568, 492 N.Y.S.2d 28 (1985), appeal dismissed, 67 N.Y.2d 645, 490 N. E.2d 549, 499 N.Y.S.2d 683 (1986), aff’d, 68 N.Y.2d 654, 496 N.E.2d 226, 505 N.Y.S.2d 67 (1986).
8.  Patane v. Griffin, 164 A.D.2d 192, 195, 562 N.Y.S.2d 1005, 1008 (3d Dep’t 1990), appeal denied, 77 N.Y.2d 810, 575 N.E.2d 399, 571 N.Y.S.2d 913 (1991).
9.  See Criales v. American Airlines, Inc., 1999 U.S. Dist. LEXIS 20582 at *17 (E.D.N.Y. Dec. 28, 1999)(citing Kalika v. Stern, 911 F. Supp. 594, 604 (E.D.N.Y. 1995)); Dolan v. Buffalo News, 188 A.D.2d 1039, 1039, 592 N.Y.S.2d 197, 197-98 (4th Dep’t 1992)).  
10.  Kasachkoff, 107 A.D.2d at 132, 485 N.Y.S.2d at 996.
11.  Loughry v. Lincoln First Bank, N.A., 67 N.Y.2d 369, 376, 494 N.E.2d 70, 73, 502 N.Y.S.2d 965, 968 (1986).
12.  Criales, 1999 U.S. Dist. LEXIS 20582 at * 17-18.  
13.  See Liberman, 80 N.Y.2d at 437, 605 N.E.2d at 349, 590 N.Y.S.2d at 862; Harris, 228 A.D.2d at 209, 643 N.Y.S.2d at 558; Kasachkoff, 107 A.D.2d at 132, 485 N.Y.S.2d at 996; Gostanian v. Henri Bendel, 1997 U.S. Dist. LEXIS 5620 at *27 (S.D.N.Y. April 13, 1997).      

14.  The court stated that, “[g]iven the general controversy and weight of conflicting case law, there is ample evidence to suggest that New York’s highest court may some day reach a different conclusion on Form U-5 immunity.  However, there is no need for this Court to make an independent legal conclusion on the substantive law.” 83 F. Supp.2d at 420.  
15.  Herzfeld, 175 A.D.2d at 691, 572 N.Y.S.2d at 684.
16.  Culver, 1995 U.S. Dist. LEXIS 10017 at *13.  
17.  Id. at 516.
18.  For a discussion of the issue of defamation in the context of a sexual harassment investigation, see Jeffrey S. Klein and Nicholas J. Pappas, Responding to Claims of Sexual Harassment, N.Y.L.J., August 18, 1994,
at 28, n. 13 and accompanying text.  

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