Friday, February 12, 2021

U-5 Filings and the Compelled Self-published Defamation Doctrine


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.


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.


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.


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.


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."

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