In a 4-2 opinion (Chief Judge Kaye not participating), the New York Court of Appeals answered a certified question from the Second Circuit U.S. Court of Appeals that statements made by an employer on an NASD termination notice are subject to an absolute privilege rather than a qualified privilege in a suit for defamation. An absolute privilege immunizes a communicant from liability in a defamation action. Communications that are protected by a qualified privilege are not actionable unless a plaintiff can demonstrate that the declarant made the statement with malice.

NASD requires a firm to file a form U-5 within 30 days of termination and to state the reasons for termination. The majority noted that (i) the filing of a Form U-5 is mandatory, (ii) the NASD is a quasi-governmental entity standing in the shoes of the SEC, (iii) the NASD investigates Form U-5s to determine if the registered person violated the Federal securities laws or NASD rules, and (iv) Form U-5 notices are often the first indication the NASD receives of possible misconduct by a registered person, and found the Form U-5 to be subject to an absolute privilege.

The dissent noted the rare instances where an absolute privilege has been afforded. It noted that other states have granted Form U-5 a qualified privilege. The dissent felt that serious personal and financial interests of the employer are at stake and acknowledged use by some firms of false Form U-5 reports to retaliate against a departing employee would be protected against by granting a qualified privilege requiring the plaintiff to prove that the statement was motivated by malice.