Defamation Law: The Qualified Privilege Defense (N.D. Ill.)

webIn Tamburo v. Dworkin, 2013 WL 5408540 (N.D.Ill. 2013), an Internet libel case, the Illinois Northern District examined the nature and reach of the qualified privilege and truth defenses to defamation claims filed by a software company against a defendant that made disparaging comments about the company on web message boards.

Facts:  Defendant, a professional dog breeder, created a website that provided free canine pedigree information to the dog-breeding community.  Plaintiffs created a Data Mining Robot that “harvested” defendant’s site data, packaged it and sold it to the public.  Defendant, irate that plaintiffs took defendant’s dog data without  permission, accused plaintiffs of stealing the pedigree information.  Plaintiffs sued for defamation and tortious interference with contract and prospective economic advantage.  Defendant moved to dismiss all counts of the complaint.

Holding: Defendant’s Rule 12(b)(6) motion to dismiss is granted.  All claims dismissed.

Reasoning:

The plaintiffs alleged that defendant’s venomous posts caused plaintiffs to fall into disrepute in the business community.  An Illinois defamation plaintiff must allege (1) a false statement about the plaintiff, (2) published to a third party, (3) that causes damage to the plaintiff.  *8. 

If its defamation per se (imputing commission of crime, infection with a loathsome disease, incompetence or lack of integrity in employment, adultery or fornication), the plaintiff doesn’t have to show special damages.  Common defamation defenses include truth, that the statement is capable of an innocent construction, the statement is an opinion (not factual), and the challenged statement is “rhetorical hyperbole.” *8.

Qualified Privilege Defense

Another defamation defense is the qualified privilege defense.  This applies where a statement implicates a legitimate interest of the speaker/publisher or an interest of the recipient of the statement/publication.  A prototypical example is a false statement that involves matters of important public concern.  

To defeat a qualified privilege defense, the defamation plaintiff must show (a) the statement was false; and (b) the defendant abused the privilege by intentionally publishing the falsehood or by displaying a “reckless disregard” concerning the statement’s truth or falsity.  Reckless disregard means the defendant “entertained serious doubts” about the truth of the statement yet failed to properly investigate its truth.  *11. 

The court held that defendant’s statements that plaintiffs’ principal was unethical and deceitful, while defamatory per se, were still non-actionable statements of opinion protected by the First Amendment.  In addition, defendant’s statements that plaintiffs stole (committed “theft”) defendant’s data and was engaged in “hacking” were substantially true: plaintiffs’ web trolling Robot did swipe data from defendant’s website without permission and later sold it for a profit.  *9,

The defendant also had a legitimate interest in protecting her time investment in compiling the pedigree information and there was a public interest in protecting private information from unconsented Web harvesting.  The Court also found that plaintiffs produced no evidence that defendant abused the qualified privilege by making the theft accusations recklessly or indiscriminately publishing them to unnecessary recipients.  *10, 13.

Finally, the Court found that defendant’s statement that the plaintiffs “took” defendant’s data and was “holding it hostage” were not actionable since the former statement was reasonably susceptible to an innocent construction (defendant didn’t literally mean that plaintiff removed the information from defendant’s site) and the latter “held hostage” statement was pure rhetorical hyperbole.  *15-16.

Case Lessons: It’s hard to prove defamation.  A defamation defendant has a varied arsenal of defenses including truth, innocent construction, opinion vs. fact and rhetorical hyperbole, among others.  The qualified privilege defense will apply where a defendant can show that he has a legitimate interest in the subject matter of the statement or if the statement implicates an important public policy interest.  In Tamburo, there an undercurrent (my interpretation) of the Court viewing plaintiffs’ practices as unfair: swiping or “scraping” the fruits of defendant’s labor (information compiled over a five-year period and provided free of charge to the pubic) and then trying to profit from it.   

 

7th Circuit Tackles Registering State Court Judgments In Fed. Court, Removal Jurisdiction

GE Betz, Inc. v. Zee Company, Inc., 2013 WL 1846541 (7th Cir. 2013) examines Federal jurisdiction and removal practice and how those rules impact creditors’ rights in post-judgment proceedings. 

Facts and Procedural History: Plaintiff obtained a multi-million dollar judgment in North Carolina state court against Defendant.  

The defendant then secretly transferred several million dollars to a Chicago bank that recorded liens against the funds and all other defendant assets.

When plaintiff found out about the transfer, it registered the NC judgment in Illinois and issued a third-party citation against the bank to whom defendant transferred its assets.

The judgment debtor (and defendant in the NC state court case) moved to transfer the case to the Northern District of Illinois under diversity jurisdiction rules.  

Plaintiff objected to removal based on lack of subject matter jurisdiction and sought remand back to NC state court.  The Northern District denied Plaintiff’s remand attempt and kept the case. 

Held: Reversed.  The District Court should have granted plaintiff’s motion for remand based on the “forum defendant” rule.  See 28 U.S.C. § 1441(b)(2). 

Rules/Reasoning: The Northern District had original jurisdiction over the action since there was complete diversity  among the parties: plaintiff is a Pennsylvania corporation, defendant is a Tennessee corporation, and the third-party respondent bank is a Delaware corporation whose principal place of business is in Illinois. 

The Seventh Circuit also held that the District Court had jurisdiction to enforce a state court judgment under section 28 U.S.C. § 1963, which permits a Federal court to register the judgment of another “district court.” 

Giving a broad reading to Section 1963, the Court noted that several state courts use the “district court” moniker.  Because of this, the Court held that the Illinois Northern District could register the NC state court judgment.  *8

But the argument that carried the day for the Plaintiff was the “forum defendant” rule.  This rule states that “a civil action otherwise removable solely on the basis of [diversity jurisdiction] may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.”  28 U.S.C. § 1441(b)(2). 

But the forum defendant rule involves a statutory defect rather than a jurisdictional one: meaning that the defect is waived if not objected to within 30 days of the removal notice. (*9), 28 U.S.C. § 1447(c)(motion to remand – other than for lack of subject matter jurisdiction – must be brought within 30 days after filing the notice of removal). 

Since the bank’s principal place of business was Illinois, it clearly met the “forum” component of the “forum defendant” test.  The Court also held that the bank was a “defendant” within the rule because its interest in the defendants assets were completely opposed to the plaintiff’s interest. (*11-14). 

Lastly, the Court found that Plaintiff properly objected to removal within 30 days – as evidenced by its motion to reconsider filed 16 days after the Northern District denied its remand motion. 

Take-away:

– If an Illinois party is sued by a foreign plaintiff and the damages exceed $75K, removal isn’t proper.  However, if the plaintiff fails to timely seek a remand, he will have waived the defect and the removal will stand;

a foreign state court judgment can arguably be registered in a Federal District Court.

 

 

Seventh Circuit Upholds Limitation of Liability Clause in Construction Contract

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In Sams Hotel Group, LLC v. Environs, Inc., 2013 WL 2402824, the Seventh Circuit upheld an Indiana district court’s validation of a contractual limitation of liability clause against a hotel developer.  In its ruling, the Court examined some recurring commercial litigation issues including the economic loss rule, and the standards that govern contractual indemnification and limitation of liability clauses. 

Facts: The owner and defendant architect entered into a $70,000 contract for the design of a six-story hotel in Indiana.  A little over a year later, when the hotel was nearly complete, numerous defects surfaced and the property ultimately had to be demolished.  The hotel never opened and the owner brought negligence and breach of contract claims against the architect.  The owner claimed it sustained over $4 million in damages due to the architect’s negligent hotel design. 

Trial Result: The Indiana district court granted summary judgment to the architect on the negligence claim based on the economic loss rule.  This rule (known as the Moorman doctrine in IL) posits that a plaintiff cannot recover for purely economic loss in tort where a contract governs the parties’ relationship – absent any personal injury or damage to other property. 

Once the owner’s negligence count was out, the parties went to trial on the owner’s  breach of contract claim.  The court ruled in the owner’s favor on that count but pared down its damages to the $70,000 architectural services contract price.  This was a harsh result considering the owner was claiming damages sixty times this amount!  The owner appealed its Pyrrhic victory to the Seventh Circuit.

The Court (applying Indiana law – this was a diversity suit) affirmed.  It first held that parties are free to enter into contracts and bargain as they see fit. * 2.  Contracts will be enforced as written absent the involvement of a consumer or a contract of adhesion (a “take it or leave it” scenario).  Since the property owner and architectural firm were sophisticated commercial entities with equal bargaining power, the Court enforced the contract’s $70,000 maximum liability amount.

The Court rejected the owner’s argument that the limitation of liability clause was an impermissible indemnification against negligence clause because it allowed the architect to avoid significant liability for its negligent design services.  *2-3. 

The Court distinguished limitation of liability provisions from contractual indemnification terms.  Limitation of liability clauses “serve to establish a contractual ceiling” on awardable damages while indemnification terms completely shield or insure a party against his own negligence. *3. 

In the latter indemnity situation, if a party wants to be indemnified for its own negligence, the contract must “clearly and unequivocally” provide that a party will pay for another’s negligence.  *2. But limitation of liability clauses can be less specific  – especially where the contracting parties are on an equal bargaining footing.  *3.

Take-aways.  In Indiana, limitation of liability provisions (which cap damages at a specific amount) are subject to less scrutiny than contractual exculpatory clauses (which completely insure a party against his own negligence).

This relaxed standard for damage limitations is even more prominent in contracts between two sophisticated commercial entities. Parties to high-dollar construction contracts should be leery of contractual terms which cap damages.