New York’s Highest Court Limits Ability of Financial Employees to Recover for Defamatory Statements

On March 29, 2007, New York State’s highest court—the New York Court of Appeals—resolved a split among lower courts concerning whether securities industry employees could sue for monetary damages stemming from an employer firm’s filing of maliciously false and defamatory comments on a form U-5 termination statement.
Employers that are members of the National Association of Securities Dealers are required to file a form U-5 setting forth the reasons for the termination of a registered financial executive within 30 days of termination. As securities professionals well know, negative termination comments on a form U-5 substantially hinders their ability to secure subsequent employment in the industry, because firms rely upon those statements in assessing whether an offer of employment should be extended.
In the past, individuals adversely affected by such statements could file an arbitration with the NASD or court action seeking expungement of a maliciously false comment, as well as monetary damages based upon economic losses caused by the defamatory statement. New York’s law of defamation generally applied, which, in addition to recognizing that truth is always a defense to a claim of defamation, provides that employers are protected by a qualified privilege in making false statements about a current or former employee. Qualified privilege will insulate an employer from liability for false statements if the employer did not act with malice or with reckless disregard of its falsity. Such claims typically arise where former employers are contacted by prospective employers seeking personnel references.


In addition to qualified privilege, absolute privilege is a recognized defense to defamation in very limited contexts. For example, defamatory or false statements made about an individual in the context of a judicial proceeding are protected by an absolute privilege. In such circumstances, the defamed party is prevented from recovering for defamation even if the false statement was made with malice and caused the party harm.
In Rosenberg v. Metlife, Inc. et al., the New York Court of Appeals was called upon to address the issue of “Whether statements made by an employer on a (NASD) employee termination notice (Form U-5) are subject to an absolute or qualified privilege in a defamation lawsuit.”
The Court in Rosenberg held that statements included in a form U-5 should be subject to an absolute privilege, and not the qualified privilege that generally attaches to statements made by employers. The Court based its decision on the NASD’s function as a quasi-judicial body and on public policy that encourages the provision of information to the public concerning the actions and competence of financial executives. Thus, the Court ruled, that financial executives could not recover damages for monetary losses incurred as a result of the defamatory statement, but could still seek the remedy of expungement for maliciously false statements, either by filing a lawsuit or arbitration.
Despite the Court’s decision in Rosenberg, it is unlikely that the number of defamation claims stemming from allegedly false termination comments on a form U-5 will decline substantially. Indeed, aggrieved employees may still feel compelled to seek judicial or arbitral intervention in order to obtain expungement or removal of the negative statements, because even a single negative statement could prevent an individual from being hired by another firm.
Nevertheless, the Court’s application of absolute privilege to form U-5 defamation claims may signal that the privilege may be applied to other industries, in which professionals are presumably monitored by regulatory agencies. Of course, the use of the absolute privilege in particular industries will depend upon the nature of the industry, the agency involved, and, perhaps, whether employers are legally required to submit similar statements to the agency.