Why Employment Lawyers Worry About Defamation

Sometime ago I saw a study that 1/3 of all defamation claims arise out of the workplace. If an employer needs chilling evidence of why that is a concern, a careful reading of last week's decision in Galarneau v. Merrill Lynch (1st Cir. 10/12/07) should provide it.


I first reported on the trial court decision as one of two million dollar verdicts in March 2005, Sticks and Stones May Break Your Bones. Although the 1st Circuit did knock out the $2.1 million dollar punitive damage award, it left intact an $850,000 judgment for compensatory damages.


The defamation occurred on the U-5 form that Merrill Lynch was required to complete when it terminated Ms. Galarneau. Among the statements contained in the form were these:

Ms. Galarneau was terminated after the firm concluded that she had (I) engaged in inappropriate bond trading in one client's account and (II) utilized time and price discretion in the accounts of three clients.

When Galarneau's expert opined that the bond trading was appropriate it was left for the jury to determine the truth of the statement.


When it agreed with Galarneau, Merrill Lynch had only its defense that the conditional privilege was not barred because of malice. Unfortunately, the Court found the same evidence that supported falsity, also supported malice: "Evidence that Merrill Lynch approved the trading as it was taking place and defended the trading after it came under attack supports the jury's conclusion that the firm either knew the statement was false, or recklessly disregarded its falsity."

Merrill Lynch's protestations that it took those actions without knowing the true facts, while completely understandable to anyone who knows how things work in the real world, were merely a jury argument that Merrill Lynch lost.


One of Merrill Lynch's most intriguing defenses, that the Court should have applied a heightened standard of defamation based on the 1st amendment because the issue involved a matter of public concern, was left on the cutting room floor. Not because the argument might not have been successful, but because it was raised for the first time in the appellate court.


Merrill Lynch also argued that the trial court's exclusion of correspondence between "Galarneau's counsel and counsel for Merrill Lynch regarding the opportunity to review and comment upon the language Merrill Lynch proposed to use in Galarneau's Form U-5," was erroneously excluded. But showing how hard it is to reverse a judgment on the basis of an evidentiary ruling, the 1st Circuit held it was not an abuse of discretion.


Those two rulings might be enough to get Merrill Lynch an en banc hearing, which would be appropriate, but it may be that it has to settle for the 2/3 reduction in its overall liability.


For employers and their counsel, Galarneau it is a clear warning of the continuing dangers of defamation in the workplace.