Labor & Employment Law Daily Former Allstate employees didn’t prove special damages from defamation, so $27M judgment reversed
Friday, November 2, 2018

Former Allstate employees didn’t prove special damages from defamation, so $27M judgment reversed

By Lorene D. Park, J.D.

Reversing a $27 million award in favor of four former Allstate employees who claimed they were defamed when Allstate filed an annual Form 10-K and issued an internal memo explaining that it hired an outside law firm to investigate allegations that portfolio managers were timing trades to inflate bonuses at the expense of their portfolios, the Seventh Circuit found that the plaintiffs failed to provide proof of special damages causally connected to the publication of the statements as required under Illinois law. The court also vacated their win under the FCRA, finding that they lacked Article III standing under Spokeo, Inc. v. Robins because they did not suffer an “injury in fact.” The case was remanded with instructions to enter judgment for Allstate (Rivera v. Allstate Insurance Co., October 31, 2018, Sykes, D.).

Investigation. The plaintiffs had been highly compensated portfolio managers in Allstate’s equity division. Suspecting they might be timing trades to inflate their bonuses at the expense of their portfolios, which included two pension funds to which Allstate owed fiduciary duties, Allstate retained outside attorneys to investigate. That firm then hired an economic consulting firm to calculate potential losses. The consulting firm found reason to believe that timed trading potentially cost the portfolios $8 million and possibly much more. Because actual losses could not be established, the consultants used an algorithm to estimate a potential adverse impact of $91 million on the pension funds. Everyone understood this estimate was wildly unrealistic, but in an abundance of caution, Allstate poured $91 million into the pension portfolios.

Plaintiffs fired. While the investigation was ongoing, Allstate closed its equity division, laid off employees, and outsourced work. Employees, including the plaintiffs, were to receive severance. Instead, based on the investigation, Allstate concluded the four plaintiffs violated its conflict-of-interest policy by timing trades. On December 3, 2009, they were fired effective immediately.

Form 10-K and internal memo. On February 25, 2010, Allstate filed its annual Form 10-K for 2009, explaining that it learned of allegations that some employees may have timed trades to enhance their individual performance under incentive compensation plans. It explained about the investigation, potential impact on portfolios, and $91 million payment. That same day, it also sent a memo to employees in its investment department describing the information in the 10-K. Neither document mentioned the four portfolio managers by name.

Lawsuit nets $27M verdict. Three weeks later, the portfolio managers filed suit for defamation based on the 10-K and internal memo. They also alleged that Allstate violated the FCRA, 15 U.S.C. § 1681a(y), by failing to give them a summary of the outside law firm’s findings after they were fired. A jury returned a verdict in favor of the portfolio managers, awarding more than $27 million in compensatory and punitive damages. Upholding the verdict, the district court tacked on additional punitive damages under the FCRA and approved the plaintiffs’ request for $357,716 in attorneys’ fees.

Defamation claims remanded. Reversing and remanding, the Seventh Circuit addressed the defamation claims first. The statements in the 10-K and internal memo were not defamatory per se, so under Illinois law, they were only actionable on a theory of defamation per quod, which required proof of special damages causally connected to the publication of the defamatory statements. Thus, the plaintiffs had to prove prospective employers refused to hire them because of Allstate’s defamatory statements and they suffered damages as a result.

Here, the plaintiffs testified that they could not find comparably lucrative work after they were fired, and their experts opined on the stigmatizing effect of for-cause termination, but they presented no evidence from any prospective employer who refused to hire them because of Allstate’s statements in the 10-K or the internal memo. That, said the appeals court, was fatal to the defamation claims. Though the plaintiffs argued that Illinois law doesn’t always require testimony from a prospective employer, the case on which they relied was inapposite because it involved persons unknown and the plaintiffs here could identify the pool of potential employers.

No standing to assert FCRA claim. The plaintiffs’ FCRA claim rested on the premise that Allstate was required by § 1681a(y)(2) to provide a summary of the outside law firm’s investigation on which their terminations were based. On this claim, the Seventh Circuit agreed with Allstate that the plaintiffs lacked Article III standing under Spokeo because they did not show that they suffered a concrete and particularized “injury in fact.”

Unlike an FCRA claim based on § 1681b(b)(3)(A), which requires that a complete copy of a consumer report and written explanation of FCRA rights be made by an employer before taking an adverse action, § 1681a(y)(2) requires only that the employer disclose a “summary” of the nature and substance of a “communication” (i.e., a consumer report) from a third party in connection with an investigation into employee misconduct. The summary need not be in writing, and specificity is not required. Finally, the summary is required only after the employer takes an adverse action, not before.

Considering that the generalized post hoc summary required by § 1681a(y)(2) does not provide information at a time or in a form that allows an employee to meaningfully respond and possibly avert an adverse employment action, the failure to provide a compliant disclosure in this case was nothing more than a bare procedural violation unaccompanied by any concrete injury. The plaintiffs argued that they were hampered in defending themselves, but (y)(2) doesn’t protect a substantive “defense” interest; at most it serves a minimal notice function. Absent a concrete injury in fact, the FCRA claims failed.

Law firm is not necessarily consumer reporting agency. Before reaching this conclusion, the appeals court took pains to explain that nothing in the record suggested the law firm retained by Allstate to investigate fell within the FCRA’s definition of a “consumer reporting agency,” nor did the parties explain how its investigation into timed trading at Allstate would qualify as a consumer report under the Act, so nothing in the appellate decision should be construed as endorsing the position that a law firm investigation like this one was covered by the FCRA.

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