Court refuses end-run around actual malice standard

Sep. 7, 2007  ·   A federal appeals court in Cincinnati (6th Cir.) held that a financial publisher could not be held liable for either defamation or breach of contract for harms to a company’s reputation potentially suffered as a result of publishing a negative credit rating.

Compuware Corp. of Detroit, Mich., sued New York-based Moody’s Investors Service for defamation and breach of contract after Moody’s downgraded Compuware’s rating from investment-grade to junk-grade status. After upholding the trial court’s grant of summary judgment, the court applied the actual malice standard to Compuware’s breach of contract claim, proclaiming that “a plaintiff may not avoid the protection afforded by the Constitution merely by the use of creative pleading.” In doing so, the court became the first federal appellate court to apply the tougher standard to a breach of contract claim.

Compuware, which provides enterprise software and information technology services to large businesses, hired Moody’s in 1999 to rate its creditworthiness. In its initial report, Moody’s assigned Compuware a rating of “Baa2,” its second lowest investment-grade rating. In 2002, while updating its report, the ratings committee became pessimistic about the company’s financial future, largely based on a lawsuit Compuware filed against its important business partner IBM, declining revenues in Compuware’s largest business production department, and an overall spending decrease in information technology. As a result, Moody’s downgraded Compuware’s rating two levels to “Ba1,” the highest of Moody’s junk-grade ratings.

In upholding the trial court’s finding of summary judgment for Moody’s, the court held that a defendant’s failure to include every relevant and potentially positive detail in its publication was insufficient to establish actual malice. Rather, the court suggested that Compuware would need to introduce evidence that Moody’s intentionally omitted these facts for the purpose of defaming the company.

Moreover, the court held that Compuware would face the same stringent standard to succeed on its breach of contract claim. Compuware contended that Moody’s did not act skillfully, diligently or in a workmanlike manner when compiling, investigating and evaluating its credit report, a claim rooted in a state law negligence action.

The court though, taking its cue from the 1988 U.S. Supreme Court case Hustler Magazine v. Falwell, found it necessary to apply the rigorous actual malice standard in order to give adequate “breathing space” to the freedoms protected by the First Amendment. The court recognized that the injury Compuware claimed to have suffered was not contractual in nature, but rather based only in injury to its reputation.

In particular, the court questioned whether Compuware would have complained had Moody’s allegedly inadequate preparation and investigation produced a positive assessment of Compuware’s financial situation. Writing for the court, Judge Alice M. Batchelder found that the lack of a contractual injury “exposes Compuware’s claim for what it is: a backdoor attempt to assert a defamation claim without the additional burden of satisfying the demanding actual malice standard.”

Moody’s attorney, Joshua M. Rubins, praised the court for distinguishing between cases like this where constitutional protections must be installed to protect speech from cases like Cohen v. Cowles Media Co., where the press would not be entitled to stricter scrutiny than would apply to other persons or organizations.

“What is at issue in these cases is whether the claim will interfere with speech,” said Rubins, who previously worked to extend the actual malice standard to tortuous interference claims in a federal appeals court in Denver (10th Cir.). “If it does, then it doesn’t matter how you cook up the claim — the first amendment applies.”

(Compuware Corp. v. Moody’s Inverstors Service, Inc.; Media counsel: James J. Coster and Joshua M. Rubins, Satterlee, Stephens, Burke & Burke, New York) — MP

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