From Nike v. Kasky to Martha Stewart: first amendment protection for corporate speakers' denials of public criminal allegations.

• Author: Caillavet, Cynthia A.

1. INTRODUCTION

   Richard Epstein once said that "[i]t is difficult to conceive of ... a defense of freedom of speech so pure as to countenance securities fraud.... (1) The regulation of false or misleading statements of material fact under the securities laws, (2) like other regulations of false or misleading commercial speech, has been upheld under First Amendment analysis, despite the fact that such regulations necessarily curtail speech. (3) This rubric is problematic, however, when applied to certain types of corporate speech that have become prevalent in today's climate of overlapping legal, political, social, economic, and popular culture.

   In particular, as highly publicized allegations of corporate criminal wrongdoing are becoming more and more common, a lively public debate, fueled by the news media, has developed regarding the guilt and innocence of "corporate celebrities." Corporate criminal allegations have incited an upsurge in a form of advertising known as the corporate image campaign, which focuses not on the products or services a company offers, but on improving the public image of the corporation itself. (4) However, public denials of criminal allegations seemingly transcend categorization as mere corporate image campaigning. Where the speech of a commercial entity is a denial of criminal allegations, such speech should be more protected than typical low-value "commercial speech," like product advertising.

   Both Martha Stewart and the Nike corporation have become embroiled in legal battles stemming from their potential liability for public statements made to defend against highly publicized allegations of criminal wrongdoing. (5) Potential liability in each case (securities fraud against Stewart and false advertising against Nike) stems from the fact that the commercial entity's denials may have affected the public's view of the corporation's business such that the speech has been categorized as lesser protected "commercial speech." (6) These two distinct corporate personalities and the analogous legal difficulties they have encountered suggest that a burgeoning class of corporate defendants may require application of unique judicial rules to avoid liability for statements merely denying public allegations of criminal wrongdoing. So long as the current trend toward highly publicized white collar criminal prosecutions continues, this class of corporate defendants dwelling in the public eye will require some protection. Regulations directed at curbing misleading commercial speech, such as securities fraud regulations and false advertising laws, for example, must be revisited to protect corporations' and corporate personalities' First Amendment speech right, a right that should be at its peak when speech is offered in defense of allegations of criminal wrongdoing.

   Policy considerations favor some form of unique treatment for corporate entities facing highly publicized criminal allegations. When corporate entities face civil liability (or even criminal conviction) for their denials of public criminal allegations, speech at the heart of the First Amendment is chilled. In particular, a commercial entity's interest in self-expression is curtailed, and a valuable check on government overreach is circumvented. Moreover, by not permitting any response, the regulations on corporate speech may be unwittingly expressive on their own; silence in the face of criminal allegations may implicitly signal to the public a corporate entity's guilt or, at least, acceptance of the charges against them. Corporate entities and the investing and consuming public have strong interests in allowing the fullest dialogue possible on issues of corporate criminality. And because the government has available more narrowly tailored means of addressing problematic false statements made during the course of a criminal investigation and trial, such regulations of speech should not be permissible under the First Amendment.

   This Comment proposes a narrow exception to the current doctrine regarding the low First Amendment protection for false or misleading commercial speech: commercial speakers whose speech rebuts public claims of criminal wrongdoing should not be held liable for claims stemming from the factual content of their denials, even if false or misleading. The basis for this exception is two-fold: that such speech is not in fact commercial and is thus afforded constitutional protection from rigorous regulation; (7) and that the right of a criminal defendant or accused to deny the allegations against him or her (and to buttress their denial with "modest factual claims") (8) outweighs the interest that the state has in regulating this narrow class of speech.

   This Comment offers an initial review of the Nike and Martha Stewart cases (Part II) before addressing the current First Amendment jurisprudence (Part III.A), particularly as it pertains to commercial speech (Part III.B) and false and misleading speech (Part III.C). This Comment then argues that a commercial entity's public denial of criminal accusations does not constitute commercial speech (Part IV.A); that commercial entities and society each have strong interests in protecting public denials (Part IV.B); that the government interest in regulating such speech is low (Part IV.C); and, therefore, that regulation of such speech violates the First Amendment right of corporate speakers. Thus, this Comment concludes that a corporate entity should not be subject to liability stemming from the denial of public allegations of criminal wrongdoing, even if the denial is false or misleading.

2. FACTUAL BACKGROUND: NIKE V. KASKY AND UNITED STATES V. STEWART

   The Nike corporation recently challenged its potential liability for statements made to defend against and rebut public allegations of human rights violations in its foreign factories. (9) Starting in 1996, Nike, a popular sporting goods company, was "besieged with a series of allegations that it was mistreating and underpaying workers at foreign facilities." (10) In response to these public allegations, Nike sent press releases, wrote letters to the media and individuals (such as university officials), and commissioned a report on the conditions of Nike's foreign facilities, denying and discrediting the public allegations. (11) Based on these public denials, a California resident sued Nike under California's Unfair Competition Law and False Advertising Law, (12) alleging that Nike made false public statements and omitted facts regarding poor working conditions in order to "maintain and/or increase its sales." (13) The trial court dismissed the suit on First and Fourteenth Amendment grounds, on motion by Nike. (14) The California Court of Appeals affirmed, but the California Supreme Court reversed and remanded on the ground that Nike's commercial speech is not afforded substantial First Amendment protection. (15) The United States Supreme Court granted certiorari to address two issues: (1) whether corporate speech as part of a public debate can be the basis of liability for factual inaccuracies, because such speech may affect consumer opinions of the business as a "good corporate citizen" and thus may be characterized as commercial speech; and (2) whether, assuming such speech is commercial, the First Amendment permits the regulation of Nike's speech. (16) However, because the Supreme Court dismissed the writ of certiorari as improvidently granted, (17) the issue has not been finally resolved.

   Even more troubling is the securities fraud case recently brought against Martha Stewart, home-making maven, chief executive officer, (18) and chairman of the board of directors (19) of Martha Stewart Living Omnimedia (MSLO). (20) In June of 2002, Stewart faced an onslaught of public interest and media coverage regarding her potential involvement in an insider trading scandal. (21) On December 27, 2001, Stewart sold her 3,928 shares of ImClone Systems Incorporated, a medicine developer. (22) Stewart was widely and publicly accused of selling her shares based on her alleged receipt of nonpublic information the day before the FDA announced its refusal to license Erbitux, ImClone's lead medicinal development, (23) though no formal charges of insider trading had been brought (and never were brought) against Stewart. (24) The story of Stewart's involvement with the ImClone scandal was published in both the Associated Press and the New York Times, relying on statements from "people close to a Congressional investigation." (25) Less than a week later, a Congressman professed to a national television audience his belief that Stewart was guilty of insider trading. (26) Stewart's potential involvement made repeated national and international headlines in the weeks and months to follow. (27) The public allegations of Stewart's involvement took a toll on the value of MSLO common stock, which fell from $19.01 per share (at closing on June 6, 2002, immediately prior to the report of Stewart's ImClone connection) to $11.47 per share on June 28, 2002. (28)

   The media reported that a vacationing Stewart had received a telephone message from her broker at Merrill Lynch that stated, "Peter Bacanovic thinks ImClone is going to start trading downward." (29) Stewart returned the call and learned that Sam Waksal, the CEO of ImClone, and his family were selling their very substantial shares of ImClone stock. (30) Based on this nonpublic information, Stewart allegedly ordered the sale of her own ImClone stock, saving herself from an 18% loss of value after the FDA's rejection of Erbitux on December 28, 2001. (31) In several public statements in June 2002, Stewart denied this version of events and claimed instead that she had prearranged with her broker an order to sell when her ImClone stock dropped in value to less than $60 per share. (32) That arrangement, Stewart maintained, was the reason for her sale of ImClone stock on December 27, 2001. (33)...