Holds on Holds: Can Sending Litigation Holds to Certain Third Parties Constitute Defamation or Tortious Interference?

by Robert B. Fitzpatrick

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In International Portfolio v. Purplefish, LLC, No. 12-06748 (Pa. Sup. Ct. Dec. 24, 2013), the Pennsylvania Superior Court recently held that a party that sent “litigation holds” to the opposing party’s business associates and clients did not, in so doing, unlawfully defame or tortiously interfere with the other party’s business. For plaintiffs’ attorneys handling cases against large employers, in which the employer’s customers or suppliers may become involved in the litigation, the International Portfolio decision is an important one because it provides room to distribute litigation holds without fear of tort claims.

The case involved a hedge fund that brought Racketeer Influenced and Corrupt Organizations (RICO) Act and fraud claims against the company that managed its debt portfolios. In a move that has become a prudent and standard practice in litigation, the hedge fund’s counsel sent litigation hold letters to other clients and associates of the defendant company, explaining what the litigation involved and the duty to preserve any documents potentially related to the litigation. 

The defendant company then brought suit in state court against the fund for defamation and tortious interference with contractual relations, alleging that the letters were not sent in the normal course of litigation proceedings - which would merit both the judicial and the litigation privilege - but were sent only to “defame, disparage, and harm Appellants.” The company argued that the facts mirrored those of Bochetto v. Gibson, 860 A.2d 67 (Pa. 2004), in which an attorney faxed a complaint to a reporter, and was later found liable for defamation.

The trial court dismissed the claims with prejudice. On appeal, the Pennsylvania Superior Court, in a December 24, 2013 opinion by Judge Joseph D. Seletyn, affirmed the trial court’s order of dismissal. Expounding on the reasons for the judicial and litigation privileges, Judge Seletyn quoted from the Pennsylvania Supreme Court’s opinion in Binder v. Triangle Publications, Inc., 275 A.2d 53, 442 Pa. 319, 324 (Pa. 1971):

“The reasons for the absolute privilege are well recognized. A judge must be free to administer the law without fear of consequences. This independence would be impaired were he to be in daily apprehension of defamation suits. The privilege is also extended to parties to afford freedom of access to the courts, to witnesses to encourage their complete and unintimidated testimony in court, and to counsel to enable him to best represent his client’s interests.”

            The court distinguished the facts of the case from those in Bochetto, reasoning that Bochetto’s activities were outside the regular course of normal judicial proceedings, while the attorneys for the fund in this instance were acting well within the regular course of proceedings by sending litigation holds with the intention of preserving evidence for litigation.

            The case, though unpublished, again demonstrates that attorneys are generally well within their rights to send litigation holds to third parties, even if those third parties are clients or business associates of the other party. No need to put holds on holds.


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Virginia Supreme Court Rejects Damages for Breach of Nondisparagement Agreement

The Virginia Supreme Court recently reaffirmed the rule that a breach of contract does not allow recovery of damages based on humiliation or injury to feelings. 

In Isle of Wight County v. Nogiec and Small v. Nogiec, 704 S.E.2d 83 (Va. 2011), the Court affirmed the trial court's reversal of two plaintiff's verdicts based on statements made by a county official in violation of a nondisparagement clause in the plaintiff's severance agreement.  As part of Alan Nogiec's decision to retire early from his position as director of the Parks and Recreation Department for the Isle of Wight County, he entered a severance agreement with the County providing that the parties would "refrain from making any disparaging comments or statements, whether written or oral, about the other or any member of the County's Board of Supervisors, administrators, or employees."  Id. at 84. 

Two months later, Patrick Small, a witness before the Board, testified that the previous Parks and Recreation director (that is, Nogiec) had made significant mistakes, and indeed, had taken action that "border[ed] on negligence."  Id. at 85.  Nogiec brought suit against the County for breach of contract, and against Small for defamation.  After trial, the court entered verdicts for Nogiec against both defendants.

The Virginia Supreme Court reversed the judgment against the County. The evidence of harm resulting from the breach, which the Court described as "embarrassment and humiliation," was not recoverable for a breach of contract.  Id. at 86.  The Court based his holding on the rule that "tort damages are not recoverable for breach of contract under the circumstances of this case."  Id. at 87.  Evidence of pecuniary damages was necessary, and Nogiec did not provide it.  The Court also pointed out that if Nogiec were permitted to prevail on both his breach of contract and defamation claims, he would have been recovering twice based on the same evidence.  Nogiec testified that he "believed" that Small's statements adversely affected his ability to find new employment, but failed to present any evidence other than the fact that he was not invited for job interviews for any of the positions for which he applied during a two-month period following Small's report to the Board.  

The Court upheld, by contrast, the verdict against Small for defamation.  Though it acknowledged that Small's testimony was entitled to a qualified privilege for reporting his duties to the Board, the Court pointed out that the circuit court had given the jury a proper instruction about malice (the necessary showing to overcome the privilege). 

In light of these holdings, lawyers drafting severance agreements should not presume that a nondisparagement clause will provide their clients with complete compensation for nonpecuniary damages.  As long as the law refuses to grant recovery of emotional distress or other tort-like damages, drafters must pay close attention to which remedies the law will actually permit.  Presumably, the parties to a severance/settlement agreement can agree, by contract, that emotional distress and humiliation, resulting from a breach of a nondisparagement clause, is compensable.  But, what employer would ever agree to such a provision?  One approach is to provide in the nondisparagement clause that proof of a breach alone without necessarily proof of actual damage, is compensable, and that the jury can determine the damages to be awarded.  Or, one could provide that proof of a breach automatically results in an award of a fixed amount of liquidated damages.  Bottom line, the Virginia Supreme Court's decision underscores the need for counsel to carefully craft nondisparagement clauses so that they have teeth and hopefully deter each side from badmouthing the other.  While the Nogiec case involves an employee being disparaged, in my experience, oftentimes nondisparagement clauses are of vital importance to management.  I would be interested in the suggestions of others on how to craft more meaningful nondisparagement clauses.

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