United States: Eleventh Circuit Slaps Sanctions On Plaintiffs For Pursuing Libel Suit Based On Intra-Corporate Memorandum

The Eleventh Circuit Court of Appeals has reversed the ruling of an Atlanta federal district court and ordered that sanctions be imposed on plaintiffs who filed a libel lawsuit based on an internal corporate memorandum. Koly v. Enney (11th Cir., March 7, 2008). The case involves a rare instance in which Rule 11 sanctions were imposed for bringing an unjustified libel lawsuit, and may indicate an increased willingness by courts to punish plaintiffs who use the courts to chill the speech of "whistleblower" corporate officers or employees.

The suit involved a claim brought by M.S. Koly ("Koly") and Delcath Systems, Inc. ("Delcath"), alleging a single count of libel against Elizabeth Enney ("Enney"). The plaintiffs alleged that Enney, who was the Regional Vice Chairman of the non-profit organization the Rolls Royce Owners Club ("RROC"), circulated a libelous memorandum to other Club leaders stating that Koly, who was RROC's Vice President of Regions and a board member of Delcath, had a serious conflict of interest and had acted improperly in relation to a payment made to RROC's Treasurer, who was also a member of Delcath's board of directors and compensation committee.

The case was first filed in federal court in Connecticut, but when that suit was dismissed due to lack of personal jurisdiction, the plaintiffs filed the Complaint in Atlanta. Defendant Enney thereafter moved for judgment on the pleadings. The district court granted the motion, concluding that the allegedly libelous memorandum was not "published," as required under Georgia law to show libel, because it was an "intra-corporate" publication and, even were it published, the memorandum merely espoused constitutionally protected "opinion". The district dourt denied Enney's Rule 11 motion for sanctions, however, ruling that although the plaintiffs' claims were "weak," they were "not based on a legal theory that has no reasonable chance of success."

On appeal, the Eleventh Circuit reversed, emphasizing that the Complaint "lack[ed] a factual or legal basis to support the plaintiffs' claim under either Georgia or Connecticut law." As to publication, the Eleventh Circuit reaffirmed the rule that material is not considered "published" if it is a communication that is "intra-corporate, or between members of unincorporated groups or associations, and is heard by one who, because of his/her duty or authority has reason to receive the information." Kurtz v. Williams, 371 S.E.2d 878, 880 (Ga. Ct. App. 1988). Thus, because Enney only sent the memorandum to Club officers and Regional and Affiliate Chairmen who had reason and authority to receive the information, the publication requirement was not met. Further, the Eleventh Circuit reiterated that opinions that reveal their factual bases are not actionable, and ruled that the Complaint lacked merit for this alternative reason because Enney had merely expressed an opinion which was supported by the true factual premises set forth in the memorandum.

In addressing the question of sanctions, the Eleventh Circuit gave no benefit of the doubt to the plaintiffs, stating: "[b]efore filing their complaint, the plaintiffs were aware of the contents of Enney's memorandum and to whom it was circulated. Based on a reasonable inquiry, they either knew or should have known that they could not satisfy necessary elements of their cause of action for libel." Thus, because Rule 11 mandates sanctions for filing "a pleading that is based on a legal theory that has no reasonable chance of success and that cannot be advanced as a reasonable argument to change existing law," the Eleventh Circuit ruled that the district court had abused its discretion in denying such sanctions. (Though the court has discretion to issue alternative sanctions, the typical sanction under Rule 11 is attorneys' fees; in this case, that amount is believed to be over $350,000.)

Corporate officers and directors should be comforted by this ruling, as it protects the right of officers and directors to express their true opinions, even if highly critical of others, within the corporate structure. Coming on the heels of the Georgia Supreme Court's ruling in Scouten that the "intra-corporate" rule is alive in Georgia, though must be scrupulously followed,¹ the Eleventh Circuit's ruling strengthens the established rule that one cannot be held liable for an intra-corporate communication or expressions of opinion by giving it the rather sharp "teeth" of putting plaintiffs at risk of monetary sanction if they file lawsuits which have no chance of success, and are filed instead to intimidate others into silence. In this way, the Eleventh Circuit's ruling can be a seen as a "corporate anti-SLAPP" ruling ("SLAPP" is an acronym for "strategic litigation against public participation", and anti-SLAPP statutes typically allow defendants to get libel suits dismissed when they are filed with the purpose of intimidation), which protects responsible corporate actors or whistleblowers from "intimidation by lawsuit."

Footnotes

1. See Client Alert: Loose Lips Result in Lawsuits: Georgia Supreme Court Limits The "Intracorporate Publication" Defamation Defense, which discusses Scouten v. Amerisave Mortgage Corp., ---S.E.2d---, 2008 WL 215416 (January 28, 2008), in which the Supreme Court of Georgia ruled that the intracorporate publication defense does not shield from defamation liability a corporate defendant that shares information about an employee's termination with employees who do not have a business need to know the information.

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