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?

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.

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