On September 13, 2012, in Hawran v. Hixon, the California Court of Appeal held that a departing CFO's defamation claims survived an early motion to strike. Hixon demonstrates that companies cannot assume that their required SEC filings and related public announcements are shielded from defamation claims by privilege or other defenses.

Case Background

Sequenom, a NASDAQ-listed company, disclosed that reported research results for a diagnostic test were faulty. When its stock price suffered, derivative and securities fraud lawsuits were filed, directors commenced an internal investigation, and the SEC investigated. Meanwhile, Hawran, the CFO (who was not involved with the research issues) alleged he was forced out in retaliation for whistle-blowing on other issues. He negotiated a resignation, allegedly relying on promises that his resignation would be kept separate from the upcoming terminations over the research flaws.

Sequenom reported the conclusions of its internal investigation and remedial measures (including the termination of two executives involved) by filing a Form 8-K with the SEC. The same Form 8-K announced the resignation of the CFO. Simultaneously, the company issued a press release. The press release lumped all departures together in a manner that the CFO considered to be defamatory: "While each of these officers and employees has denied wrongdoing, the special committee's investigation has raised serious concerns, resulting in a loss of confidence by the independent members of the company's board of directors in the personnel involved." The CFO sued the company and individual directors for defamation and related claims.

Counsel for Sequenom and the individuals filed a motion under California's anti-SLAPP law (SLAPP stands for Strategic Lawsuits against Public Participation). If both prongs of the anti-SLAPP statute are met — (1) the claim arises from protected speech and (2) lacks even minimal merit—the lawsuit can be stricken at the outset. The trial court granted the anti-SLAPP motion in part, but left standing Hawran's claims against all defendants for defamation, invasion of privacy (false light), and unfair business practices. Both sides appealed.

The Court of Appeal's Holding

Hawran argued that the Form 8-K and press release fell within the "commercial speech" exception to the constitutional protection of free expression, and thus were not protected by the anti-SLAPP law. The Court of Appeal rejected that argument, reasoning that the commercial speech exception is narrow. The court then analyzed whether the former CFO's allegations had enough arguable merit to proceed. In a very detailed opinion, the Court concluded the CFO's defamation-based claims could go forward.

The court also rejected Sequenom's arguments that its press release was privileged as a matter of law, either absolutely or conditionally.

  • The "official proceeding privilege" absolutely protects communications intended to report wrongdoing to the government or trigger a government investigation. Prior cases have concluded that both the litigation privilege and the official proceeding privilege may protect statements regarding company departures made on Form U-5 (also known as the Uniform Termination Notice for Securities Industry Registration). But statements made concerning the subject matter of a U-5 not on the U-5 form itself have been held outside the privilege. The court reasoned that an SEC Form 8-K is further removed from an official proceeding than a securities industry Form U-5, and a press release is still further removed. So there was no absolute privilege to protect Sequenom's statements.
  • The court also held that the "reporting privilege" does not apply. This privilege protects fair and true reports of a public official proceeding (or anything said in the course of such proceeding) if made to a public journal. The press release did not mention the SEC investigation or capture the official investigation's gist or substance. Accordingly, the reporting privilege was inapplicable.
  • A conditional privilege protects statements made without "malice" on subjects of mutual interest. The court held that Sequenom could not invoke this privilege because it disseminated its press release beyond prospective investors and other interested parties. Further, malice would exist if the publication was motivated by ill-will or if the author had no reasonable belief in the truth of the statements, and here Hawran alleged that Sequenom was motivated by ill will, as the result of his whistleblowing on unrelated subjects.

The Court of Appeal also rejected the defendants' argument that some statements (such as "denies wrongdoing" and "lost the confidence of the board") were true or that they were mere statements of opinion. The court refused to parse the press release and focused instead on the overall impression it conveyed. "Denies wrongdoing" implied an accusation of wrongdoing. "Internal investigation has raised serious concerns" implied factual underpinnings. These statements were not couched as opinion. Press releases are factual, as opposed to rhetorical, persuasive, or evaluative. Although Hawran admitted that he had been told that the directors had lost confidence in him, as the press release reported, even a literally accurate statement is defamatory if it has a false implication. Here, the press release falsely implied Hawran's involvement in the research wrongdoing.

What Hixon Means for Employers

Employers, including public companies required by securities regulations to report executive separations, must take great care in formulating departure-related announcements and disclosures. Inconsistencies between statements regarding the reasons for a separation are potentially a red flag, and could cast doubt on which version is true. Likewise, stating a "laundry list" of reasons for separation can make it more difficult to prove the truth of each one. Reaching a broader audience with a press release may not always be appropriate. Dissimilar terminations should not be indiscriminately lumped together in SEC filings or press releases. Companies should consider defamation law when determining (1) how to announce executive departures and (2) what the content of such announcements will be.