New York Appellate Court Adopts "Endorsed or Intended" Threshold Test for Libel by Implication

On May 29, 2014, a panel of the New York Supreme Court, Appellate Division, First Department resolved the "open question" posed two decades ago and issued the first decision by a New York appellate court to establish a standard for defamation by implication cases – a standard that has significant positive implications for media defendants  Stepanov v. Dow Jones & Co., Inc., 2014 NY Slip Op 03940 (1st Dep't May 29, 2014).  In affirming the lower court's dismissal of a defamation lawsuit, the First Department held that, in order to state a claim for defamation by implication, a plaintiff must first make a "rigorous showing" not only that the article in suit "as a whole can reasonably read to impart the defamatory inference," but also that the article "affirmatively suggest[s] that the author intended or endorsed that inference." This is a "threshold" question turning on "whether the plain language of the communication itself suggests that an inference was intended or endorsed," permitting an early resolution on a motion to dismiss of what has become a standard, but sometimes elusive, claim in the libel plaintiff's arsenal. In so deciding, the First Department joined other jurisdictions (such as the 4th and D.C. Circuit Courts of Appeals) that have adopted the "endorsed or intended" standard.

Background

On April 18, 2011, Barron's, America's premier financial weekly and a Dow Jones publication, published an article titled "Crime and Punishment in Putin's Russia," written by Bill Alpert. The article reported on a complaint sent to Swiss authorities (the "Hermitage Complaint") by British counsel for the defrauded hedge fund, Hermitage Capital Management Limited.

The Hermitage Complaint alleged that Swiss bank accounts were used to launder the proceeds of the largest tax fraud in Russian history, which resulted in a fraudulently obtained tax refund of $230 million, issued on Christmas Eve 2007. Bank records included in the Hermitage Complaint showed large money transfers flowing through shell corporations in late 2007 and early 2008 to accounts connected to Olga Stepanova, the Russian tax official whose Moscow tax bureau had approved the fraudulent refund, and her then-husband, Vladlen Stepanov. The Article said "the use of offshore shells to hide income and assets isn't, on its own, illegal," but queried whether Credit Suisse had complied with Swiss money-laundering reporting obligations regarding these transfers. The Hermitage Complaint resulted from an investigation commissioned by William Browder, co-founder and chief executive of the hedge fund, Hermitage, the victim of the tax fraud. Hermitage's lawyer, Sergei Magnitsky, who was investigating the fraud, was arrested on charges of fraud and died at age 37 in prison, allegedly after being tortured by police, one of four deaths associated with this tax fraud. The tax fraud and its aftermath led directly to the United States Congress's passage of the Magnitsky Act, which sought to deny entry to the U.S. to Russian officials suspected of being responsible for Mr. Magnitsky's death.  Adding insult to injury, Russia convicted Magnitsky post-mortem, and Browder in absentia, for purported tax evasion.

In the 3,047-word, forty-paragraph Article, only three paragraphs even mentioned plaintiffs Maxim A. Stepanov and the company he founded, Midland Consult (Cyprus) Ltd ("Midland Consult"). Nothing in the article stated or implied that they were complicit in, or even aware of, the alleged money laundering or the underlying alleged tax fraud. Rather, the article mentioned plaintiffs only in the truthful context that their business (which involves setting up and selling of shell corporations) had a connection to a New Zealand shell corporation, Bristoll Export, which had made one of the Swiss money transfers described in the Hermitage Complaint. Several months after the article was published, plaintiffs wrote a letter demanding that Barron's remove the article from its website or delete any references to plaintiffs. Dow Jones declined to do so, but offered to correct a minor factual error in the Article. In March 2012, plaintiffs filed suit.

The complaint challenged four statements – two purportedly associating plaintiffs with the activities of another creator of shell companies, GT Group, which had raided by police and linked to illegal arms dealing and drug cartels ("GT Statements"); one about Midland Consult employees serving as directors of a shell corporation, Midland New Zealand, connected to Bristoll Export which had made suspicious transfers to the accounts identified in the Hermitage Complaint ("Directors Statement"); and one identifying Maxim Stepanov as a former Russian diplomat ("Diplomat Statement"). Dow Jones moved to dismiss, arguing that no reasonable reader could find the article linked plaintiffs with GT Group's activities simply because it mentioned that GT registered a shell company affiliated with plaintiffs; the Diplomat Statement was entirely true and incapable of defamatory meaning; the Directors Statement was substantially true, and the one mistake it contained (about which shell company was nested inside which other shell company) was trivial and had the same gist as the correct statement. Dow Jones also argued that the statements were a fair report of the Hermitage Complaint and should be privileged under Section 74 of the New York Civil Rights Law. Plaintiffs, in contrast, argued that even if the article was factually correct, it created a false impression by placing plaintiffs in the context of an article about wrongdoing by others – particularly since two of the others shared plaintiff Stepanov's last name, and Dow Jones failed to mention that they were not related. According to plaintiffs, Dow Jones should also have given the timeline of when plaintiffs worked with GT Group (before the police raid); when Stepanov was a Russian diplomat (prior to the presidency of Vladimir Putin, who was named in the article's headline); and when plaintiffs' employees were affiliated with Bristoll Export (prior to the money transfer at issue in the article).

Justice Ellen M. Coin granted DJ's motion to dismiss on the grounds that the challenged statements were either not of and concerning plaintiffs, not defamatory, or not false. Adopting the standard suggested by defendant, Justice Coin found that nothing on the face of the article suggested that the author intended or endorsed the inferences of which plaintiffs complained. Justice Coin also found section 74 did not apply because the Hermitage Complaint was made to a foreign entity.

Plaintiffs appealed Justice Coin's decision to the First Department. The parties' argument on appeal reflected their arguments below; plaintiffs argued that, read as a whole, the article defamed them by associating them with wrongdoing and failed to cite to facts that would have made clear to readers that plaintiffs did not belong in the article at all. Dow Jones argued that the implications that defendants purported to find in the article simply were not there and that nothing on the article's face suggested that those implications were intended or endorsed.

The First Department's Decision

The First Department began its decision by citing to Armstrong v. Simon & Schuster, 85 N.Y.2d 373, 381 (1995), in which the Court of Appeals stated that the choice of which test to apply to claims of defamation by implication must "await another day." That day, announced the First Department, "has finally come."

Associate Justice Paul Feinman, writing for a unanimous court, first found that there was no express defamation, because plaintiffs' claims were "based on substantially true statements that are not reasonably susceptible of defamatory connotations." In particular, the corruption described in the article involved Russian police and tax officials, not diplomats, so describing Stepanov as a former Russian diplomat was not defamatory even in the context of the article's headline.

The court then turned to defamation by implication, noting that the trial court had adopted the approach taken by the U.S. District Court for the Southern District of New York in Biro v. Condé Nast, 883 F. Supp. 2d 441, 463-67 (S.D.N.Y. 2012), as well as cases in the 4th Circuit, the D.C. Circuit, and a New York Supreme Court case affirmed by the First Department. The court examined the test endorsed by plaintiffs, which did not require a showing that the defendant intended or endorsed a defamatory inference. Plaintiffs had argued that they were not public figures and therefore should not be required to show what the author intended or endorsed. The court pointed out that plaintiffs were conflating actual malice – a subjective standard about what the author believed at the time of publication – with the "intended or endorsed" test, an "objective" standard based on "the plain language of the communication itself." New York courts had previously indicated that proof that the author intended or endorsed the implication was required on summary judgment at the fault stage, even for gross irresponsibility. See, e.g., Chaiken v. W Publishing Corp., 907 F. Supp. 689 (S.D.N.Y. 1995), aff'd, 119 F.3d 1018 (2d Cir. 1997); McCormack v. County of Westchester, 731 N.Y.S. 2d 58 (2d Dept. 2001). The "threshold" "objective" test was in addition to and in advance of the fault requirement and can properly be raised on a motion to dismiss looking at the publication on its face.

The court adopted the objective "endorsed or intended" standard, saying, "We believe this rule strikes the appropriate balance between a plaintiff's right to recover in tort for statements that defame by implication and a defendant's First Amendment right protection for publishing substantially truthful statements" (citing Armstrong, 85 N.Y.2d at 381).

The court agreed that the "minor omission of the timeline" as to when employees of Midland Consult served as directors did not lead to an implication that Midland had a direct connection to the suspicious wire transfer that had occurred earlier. Nor did the court believe that adding the timeline would reveal that plaintiffs had no place in the article; the point of mentioning plaintiffs, the court noted, was because a number of risk factors identified by experts in the article as associated with suspicious transactions that could trigger the obligation to report to regulators by the bank, were present here, as set forth in the Hermitage Complaint. That Stepanov was a former Russian diplomat was associated with a risk factor – "politically connected individuals" – and that Midland Consult was located in Cyprus – a "high risk jurisdiction" – were both relevant. Finally, the court noted that there was no reasonable reading of the article that imparts the inference that plaintiff Stepanov was related to Olga Stepanova and her husband – particularly since the plaintiffs had acknowledged that the name Stepanov in Russia is as common as Smith in the United States. 

Current Status

On June 17, 2014, the same plaintiffs lost their appeal in the Court of Special Appeals of Maryland which affirmed dismissal of a very similar libel claim against the Journalism Development Network, Inc., a non-profit dedicated to investigative journalist.  The plaintiffs' time to appeal the New York decision has expired without the plaintiffs' seeking leave to appeal from the Court of Appeals.

Originally published in the June 2014 issue of the MLRC MediaLawLetter