Last
year, the California Court of Appeals issued a highly instructive opinion in
the area of U-5 defamation. Some excerpts from that opinion will help us get
started on a variety of blogs. The case is Tilkey v Allstate Insurance Company.
INTRODUCTION
While
Michael Tilkey and his girlfriend Jacqueline Mann were visiting at her home,
the two got into an argument. Tilkey decided to leave the apartment. When he
stepped out onto the enclosed patio to collect his cooler, Mann locked the door
behind him. Tilkey banged on the door to regain entry, and Mann called police. Tilkey
was arrested and pled guilty to a disorderly conduct charge only, and other charges
were dropped. After Tilkey completed a domestic nonviolence diversion program,
the disorderly conduct charge was dismissed as well.
Before
the disorderly conduct charge was dismissed, Tilkey's company of 30 years,
Allstate Insurance Company (Allstate), terminated his employment based on his
arrest for a domestic violence offense and his participation in the diversion
program. Allstate informed Tilkey it was discharging him for threatening
behavior and/or acts of physical harm or violence to another person. Following
the termination, Allstate reported its reason for the termination on a Form U5,
filed with Financial Industry Regulatory Authority (FINRA) and accessible to
any firm that hires licensed broker-dealers like Tilkey. Tilkey sued Allstate
for wrongful termination and compelled self-published defamation.
The
jury returned a verdict in Tilkey's favor on all causes of action and awarded
him $2,663,137 in compensatory damages and $15,978,822 in punitive damages. The
Court of Appeals concluded that compelled self-published defamation is a viable
theory, and substantial evidence supported the verdict that the statement was
not substantially true. The court did, however, remand the matter for
recalculation of the punitive damages award.
FACTS
On
August 31, 2014, Mann sent an e-mail to Tilkey at work mentioning the charges
that had been filed against him. A field compliance employee later discovered
this e-mail while conducting a routine compliance review and forwarded it to
Human Resources (HR). HR professional Tera Alferos conducted the initial
investigation, and she interviewed Tilkey. She noted Tilkey had been asked to
accept a plea deal to have two of the three charges dropped, then the last one
dismissed. She never spoke with Mann or interviewed the arresting officers. She
also did not investigate Mann's background or review her social media accounts.
A
couple weeks later, Alferos sent her supervisor a summary of her investigation,
which stated that the police report had been reviewed and noted Tilkey had been
charged with but not convicted of a crime. The summary also explained there was
no FINRA reporting obligation because there were no felony charges, and it
concluded there had been no violation of company policy.
A
supervisor then changed the conclusion to state Tilkey's behavior may have been
at a level that caused the company to lose confidence in him. At the
supervisor’s request, Alferos next added references to the domestic violence
charge because it suggested Tilkey had engaged in behavior that could be
construed as acts of physical harm or violence toward another person, in
violation of company policy. In an e-mail referencing the decision to terminate
Tilkey's employment, a Ms. Metzger wrote that they were amending the reason for
terminating Tilkey to be "violence against another person whether employed
by Allstate or not. "It identified the policy violation as "[t]hreats
or acts of physical harm or violence to the property or assets of the Company,
or to any person, regardless of whether he/she is employed by Allstate." When
the company terminated his employment, it informed Tilkey, "Your
employment is being terminated as a result of engaging in behaviors that are in
violation of Company Policy. Specifically, engaging in threatening behavior
and/or acts of physical harm or violence to any person, regardless of whether
he/she is employed by Allstate."
The
company then filed a Form U5 with FINRA reporting its reason for terminating
him as follows: "Termination of employment by parent property and casualty
insurance company after allegations of engaging in behaviors that are in
violation of company policy, specifically, engaging in threatening behavior
and/or acts of physical harm or violence to any person, regardless of whether
he/she is employed by Allstate. Not securities related."
Tilkey
sued Allstate asserting three causes of action: (1) violation of California
section 432.7; (2) wrongful termination based on noncompliance with section
432.7; and (3) compelled self-published defamation to prospective employers. Following
trial, the jury returned a verdict for Tilkey and awarded $2,663,137 in
compensatory damages, with $960,222 for wrongful termination and $1,702,915 for
defamation, and $15,978,822 in punitive damages. Allstate moved for a new
trial, which the trial court denied. Allstate appealed.
I:
WRONGFUL TERMINATION
Allstate
argued it did not violate the California wrongful termination statue (432.7) when
it used as a factor in its termination decision Tilkey's arrest and subsequent conditional
plea and entry into a diversion program. Tilkey countered that the company's
reliance on his arrest records violated section 432.7; thus, he was wrongfully
terminated. The parties' disagreement hinged on the interpretation of section
432.7, subdivision (a)(1), which prohibits employers from utilizing as a factor
in employment decisions any record of arrest or detention that did not result
in conviction or any record regarding referral to or participation in any
pretrial or post trial diversion program.
Allstate
argued a conditional plea agreement qualifies as a conviction. Tilkey contended
he never entered a guilty plea; thus, there was no conviction. The court
concluded we conclude the term "conviction" as defined in section
432.7 does not require entry of judgment: “The plain language here makes clear
that a judgment is not required because the conviction can exist without
respect to sentencing. (See ibid.) The statute's legislative history supports
this interpretation.” A conviction under section 432.7 does not require an
entry of judgment; it simply requires entry of a guilty plea. Thus, Allstate
did not violate section 432.7 by using Tilkey's arrest as a factor in its
decision to terminate his employment.
II:
DEFAMATION
Allstate
next challenged the defamation verdict, contending that self-compelled
defamation should not provide a basis for a defamation per se cause of action.
It further contended there was no evidence that Tilkey's self-publication was
compelled by its publication of the reason for his employment termination on
the Form U5 because that publication contained a privileged statement. Finally,
Allstate maintained that its statement was substantially true, justifying
reversal of the verdict.
For
a valid defamation claim, the general rule is that "the publication must
be done by the defendant." (Live Oak Publishing Co. v. Cohagan (1991) 234
Cal.App.3d 1277, 1284 (Live Oak Publishing).) But there is an exception
"when it [is] foreseeable that the defendant's act would result in [a
plaintiff's] publication to a third person." For the exception to apply,
the defamed party must operate under a strong compulsion to republish the
defamatory statement, and the circumstances creating the compulsion must be
known to the originator of the statement at the time he or she makes it to the
defamed individual.
Compelled
Self-Published Defamation Per Se
In
an action for defamation per se, the meaning is so clear from the face of the
statement that the damages can be presumed. The originator of the statement is
liable for the foreseeable repetition because of the causal link between the
originator and the presumed damage to the plaintiff's reputation but the
publication must be foreseeable. The
presumed injury is no less damaging because the plaintiff was compelled to make
the statement instead of the employer making it directly to the third party.
Allstate offered several other arguments for why the Court should not accept a
theory of compelled self-published defamation.
Form
U5 Privilege
Allstate
provided a written explanation for Tilkey's termination of employment on the
Form U5 to FINRA, which was available to every prospective employer of similarly
licensed employees. Thus, disclosure was not absolutely privileged. Thus,
Tilkey was compelled to explain the reason for his discharge, and this
repetition was reasonably foreseeable.
Additionally,
the qualified privilege that attaches to communications about an employee's job
performance when made without malice or abuse to a third party likewise
protects an employer against compelled self-published defamation. This
conditional privilege helps protect the free flow of reference information.
Firms
are required to file a Form U5 with FINRA whenever a registered representative
leaves the firm. If the registered representative's employment has been
terminated, the form asks the firm to provide a reason for termination. When
the Form U5 identifies allegations of improper conduct by a broker-dealer, an
issue that FINRA may need to investigate, it can on those occasions be
considered "a communication made 'in anticipation of an action or other
official proceeding.' (Briggs v. Eden Council for Hope & Opportunity
(1999) 19 Cal.4th [1106,] 1115.)" (Fontani v. Wells Fargo Investments,
LLC (2005) 129 Cal.App.4th 719, 732, disapproved of on other grounds in Kibler
v. Northern Inyo County Local Hospital District (2006) 39 Cal.4th 192.) In
those instances, the information reported on the Form U5 would be protected by
the absolute privilege outlined in Civil Code section 47, subdivision (b), at
least in California.
Section
7 of the Form U5, however, includes a
list of disclosure questions for full terminations that asks if the terminated
employee was the subject of a governmental investigation; was under internal
review for fraud, wrongful taking of property, or violated investment related
laws, regulations, or industry standards relating to compliance; was convicted
of or pled guilty to a felony; or was convicted of or pled guilty to a misdemeanor
that related to investments, fraud, false statements, bribery, perjury,
forgery, counterfeiting, extortion, or wrongful taking of property. These
questions make clear that FINRA seeks termination information that allows it to
assess whether the employee's conduct lacked compliance with regulatory
requirements in the securities arena. FINRA does not ask for information about
non-securities-related activities because that information falls outside its
scope of regulation.
Thus,
according to the California Court, the absolute privilege extends to
communications required by FINRA, i.e., fraud- and securities-related
information. However, the communication of Tilkey's termination here did not
regard improper securities-related conduct, and Allstate did not limit its
responses to fraud- and securities-related information. Instead, Allstate
explained Tilkey's departure was the result of a "termination of
employment by parent property and casualty insurance company after allegations
of engaging in behavior that are in violation of company policy, specifically,
engaging in threatening behavior and/or acts of physical harm or violence to
any person, regardless of whether he/she is employed by Allstate. Not
securities related." This statement did not contain allegations of
improper securities conduct, theft, or allegations or charges of fraud or
dishonesty. It was not offered in anticipation of or to initiate an
investigation; nor was it offered in the course of any other official 29 proceeding.
(See Civ. Code, § 47, subd. (b).) Thus, the absolute privilege does not apply[1].
Substantial
Evidence Supported the Jury Findings That Tilkey Was Compelled to Self-Publish a
Statement That Was Not Substantially True
The
jury concluded that Tilkey was under strong pressure to communicate Allstate's
defamatory statement to another person. There was ample evidence to support
this conclusion. A “vocational evaluator” testified Tilkey would have a
difficult time ever getting another job because he had been terminated, and the
reason for termination reported on the Form U5 was negative. He also noted that
because Tilkey sold life insurance, he was required to hold securities
licenses, and agencies and employers hiring those with securities licenses
would have access to U5 forms. Tilkey's supervisor at Allstate, testified that
Allstate routinely reviewed the securities public information from the Form U5
of any person they were hiring, and he could not recall ever hiring anyone at
Allstate whose Form U5 stated he was terminated for cause. Tilkey testified
that when he recruited agents, he would have someone check the Form U5, and he
never hired anyone whose Form U5 showed the termination was for cause. He also
never received an interview from any company that had access to a Form U5, even
though he had 30 years of experience and performed well, receiving the third
largest bonus in the state just a few weeks before his termination. Even if the
company never offered any specific information about the reason for Tilkey's
discharge from employment to prospective employers, its statement at the time
of discharge and its reporting of the information on the publicly available
Form U5 necessitated Tilkey's self-publication in other settings. In sum, the
Court of Appeals upheld the defamation verdict but concluded that the punitive
damage award was excessive. More on that later.
[1] Had Allstate
instead eliminated the specifics in its statement, privilege may have attached
because Allstate was required to report the termination. For example, it could
have supplied the following statement: "Termination of employment by
parent property and casualty insurance company after allegations of engaging
behavior that are in violation of company policy. Not securities related."
