Risk & Compliance

Bad Chat and Cybersmears

Your company's name is being dragged through Internet mud. How can you protect your company, reassure investors, and prevent it from happening again?
Courtney L. Birnbaum and Dori Ann HanswirthOctober 1, 2000

Many companies battle the effects of bad chat and cybersmears — disparaging material posted on the Internet’s many bulletin boards, message boards, newsrooms, and other common areas. These battles often result in lawsuits for defamation, business disparagement, tortious interference with a contract or business relationship, or unfair business practices.

A lawsuit, however, may not be the most effective recourse because of protections afforded by the Communications Decency Act of 1996 (CDA) and the relatively shallow pockets of the typical cybersmearer. In addition, a company that reacts publicly may make things worse by raising awareness of the damaging statements. When you consider your response to defamatory Internet postings, first consider your objectives. Positive and preventative actions will usually lead to faster and better solutions.

In the early 1990s, plaintiffs seeking redress for online defamation brought suits against Internet service providers rather than individual authors because authors are typically anonymous and generally financially unattractive compared with a business. With lawsuits mounting, Congress enacted the CDA, which established a level of immunity for interactive computer service providers and users, and shielded service providers from liability for distributing material over the Internet. (In other jurisdictions, such as England, service providers are held liable as publishers.)

With the CDA, lawsuits in the US became a much less promising remedial tactic for companies, but they did become an effective means of identifying anonymous authors. Because Internet service providers are required to reveal the identity of subscribers upon receipt of a subpoena, and because they themselves enjoy legal immunity, they are increasingly forthcoming. Many plaintiffs are naming “John Does” as defendants, then using the subpoena process to identify the source of damaging material.

Companies often find that their defamers are current or former employees. In these cases, companies prefer to deal with such individuals within the structure of the employer-employee relationship. Generally, employees are terminated or quit due to embarrassment. In most cases, once the author is discovered or confronted, the dissemination of the material is discontinued.

A Pound of Cure

Literature on bad chat and cybersmears illustrates a remedial action plan with minimal focus on preventative measures. The recommended steps include:

  1. Implement a mechanism to monitor the Internet for bad chat.
  2. Counsel employees not to discuss the company online.
  3. Develop a communications response plan with the advice of counsel. This plan may include tactics to identify the anonymous poster; to send this person or the interactive computer service provider a notice to cease and desist the material in question; to ask for an admission and apology; and to post a response to clarify misinformation or respond to allegations.
  4. File an action for damages and injunctive relief, and notify the Securities and Exchange Commission.

There are several pitfalls associated with the plan described above. To begin, it is costly to employ personnel with the skills to monitor the Internet effectively, and counseling employees not to discuss the company online is, at best, an expression of distrust. The remaining recommendations involve instigating legal action, and these options should be approached with caution. While it is wise to seek legal counsel when bad chat spooks investors, legal action may not bring the desired results.

When deciding whether to bring a legal action, company executives must have a clear understanding of what results will help and what will hurt. They must also have a comprehensive understanding of their options and the full sequence of consequences that could accompany each potential action. For example, if quieting Internet authors is the sole objective, obtaining a subpoena may be an effective tactic. But since this can be done only upon filing a lawsuit, a very public “Goliath attacking David” scenario could ensue. A simple request made to the Internet service provider might be just as effective.

In some circumstances, a company’s best interest can be served only by initiating a lawsuit for defamation and related claims. These lawsuits can be slow, expensive, and unreliable because monetary damages are difficult to quantify and awards cannot directly remedy the loss. Further, injunctive relief is rarely granted because restraints on speech are considered to violate the First Amendment; thus, the typical “successful” result does not compensate the company for the injury.

In lieu of (and sometimes in addition to) bringing legal action, a company may decide to make a counterdisclosure. While this seems to be a relatively quick and effective positive action, it is important to remember that like a defamatory message, a counterdisclosure may influence investors and raise their legal activity. It is critical that counterdisclosures are accurate, complete, and in compliance with SEC regulations regarding dissemination and maintenance. The company should consult legal counsel and public relations experts before disseminating any information over the Internet, particularly when the interest of investors has been keen.

However, if a counterdisclosure is not necessary, it is probably best to avoid highlighting sensitive issues in counterremarks that may be viewed as defensive. Conversely, however, it is important to realize that disclosure of counterinformation may be required. The company must notify the SEC if it is believed that the posted material might mislead investors or the public about the condition of the company, its assets, or its liabilities. Furthermore, the New York Stock Exchange, Amex, Nasdaq, and other groups may impose a duty on a public company to respond to inaccurate information posted on the Internet to prevent the occurrence of stock manipulation or securities fraud.

An Ounce of Prevention

The preceding recommendations are not an ideal remedy for the impact of defamatory material posted on the Internet. Because current and former employees are responsible for posting much of the damaging material, it is more effective to prevent the posting in the first place. A company that anticipates such a need should prepare, implement, and periodically update employment policies covering disclosures about the company, and impress upon employees the relevance of public image to the financial condition of the company and to each employee.

A company that offers stock-option or profit-sharing plans is in an ideal position to employ a preventative strategy, by impressing upon employees a shared understanding that the company’s advancement and well-being will translate directly into each employee’s personal financial gain and job security. Clear, consistent, and frequent communication is critical to the success of this strategy, and even former employees may have disincentives to hurt the company if stock bonus allocations accrue at intervals that give them a continuing stake in the company’s fortunes.

Companies that cannot present such a clear cause-and-effect relationship must consider more creative methods to discourage damaging postings. These companies might consider organizing bimonthly meetings for different levels of employees. At the beginning of every meeting, management could present its plan of action, after which the managers would withdraw. Employees would be encouraged to discuss and write down complaints, as well as positive information and recommendations for management, which would assess these issues and form a plan to rectify the situation, clarify procedures, or implement suggestions.

Although employees may be a major source of bad chat and cybersmears, material may also originate from company investors. The SEC, which began its surveillance of Internet fraud and stock manipulation in 1995, has found that cybersmears against microcap companies are among the most prevalent types of fraud on the Internet. This type of defamation is most often perpetrated by investors with the intent of driving down the price of a company’s stock and taking advantage of a short position.

In July 1998, the SEC formed the Office of Internet Enforcement, which seeks to discover and prosecute perpetrators of Internet securities fraud and stock manipulation, and to educate investors about the existence of these schemes and, in general, the prevalence of widespread dissemination of false and misleading information on the Internet. To date, however, the SEC has not provided companies with any preventative measures, remedial measures, or notification procedures. Rather than simply waiting for the good word from Washington, your company will be better served by putting the appropriate policies in place.

Dori Hanswirth is a partner with the litigation and media departments of Squadron Ellenoff, which has offices in New York and Los Angeles. Courtney L. Birnbaum is an associate with the corporate department of the firm.