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TWO RECENT DECISIONS in Illinois -- one in federal court and one in state court -- foretell a possible trend toward intolerance of workplace defamation and a willingness to hold the corporate employer responsible.

In the state case, Gibson vs. Philip Morris Inc., the Illinois Court of Appeals confirmed a trial court judgment and an award of compensatory and punitive damages in favor of the plaintiff, a sales manager, on his complaint of defamation.

The plaintiff, Randy Gibson, was awarded $115,000 in lost wages and benefits and $100,000 for personal humiliation and mental suffering. In addition, he was awarded $1 million in punitive damages against Philip Morris, whose employees defamed the sales manager when they falsely accused him of selling company incentive items at a yard sale.

The plaintiff was employed by Philip Morris as a sales manager for six years. As such, he kept incentive items in his garage for distribution to his sales representatives. He was terminated, approximately five months after a new boss came on the scene, for "falsification and selling incentive items." The allegation of selling incentive items was based on two co-workers' statements to Gibson's new boss that they saw incentive items -- Marlboro belt buckles -- at a yard sale at the plaintiff's home.

The yard sale occurred about one year prior to Mr. Gibson's termination. The co-workers stated that they were at the plaintiff's home on the date in question and observed the belt buckles "near the vicinity" of items at a yard sale. None of the statements by the fellow employees established that any actual sale of incentive items occurred or that the plaintiff participated in the yard sale.

Philip Morris' defense was that the statements, even if defamatory, were not published outside Philip Morris; therefore, there was no defamation. The court agreed that Philip Morris had a qualified privilege for internal statements; because the company acted with malice, however, the privilege did not apply.

But what makes the decision most interesting is that the court went on to state that Philip Morris "improperly investigated the truth of the co-workers' statements." The sales manager's boss admitted he had failed to allow Mr. Gibson to explain the situation. Further, the boss had "passed the defamatory statements on to other corporate officials without discerning the truth of the statements."

In ruling in favor of Mr. Gibson, the court's words are telling: "Defendants failed to investigate (the co-workers') statements fully and acted with reckless disregard of plaintiff's reputation. The statements were not the result of an investigation but were gratuitous gossip maliciously conjured into a reason for discharge. This evidence supports a determination that the defendant Philip Morris' actions constitute actual malice, and we affirm the trial court's award of punitive damages."

It seems clear that the plaintiff's boss seized on some statements by gossip-mongering -- and perhaps envious -- co-workers who were all too willing to "deal dirt" on a fellow employee who had invited them to his home after a sales meeting.

Philip Morris was liable in this situation because it did not allow the plaintiff to defend himself. It also refused to provide Mr. Gibson with copies of the co-workers' statements and paid heed to just one side of the story.

The court's ruling makes clear that when an employer uses innuendo or negative information to make an employment decision and fails to conduct an even-handed investigation of the truth of that information, it can be held financially responsible for the resultant damage to the employee's reputation.

Issues similar to those in Gibson vs. Philip Morris also surface in the more recent decision of the 7th U.S. Circuit Court of Appeals in Dawson vs. New York Life Insurance Co. The plaintiff in this case, Ronald Dawson, was the general manager of New York Life's office in Corpus Christi, Texas. An agent in the office fraudulently increased the value of a life insurance policy and annuity for a customer. The agent enhanced the value from $100,000 to $1 million and then falsified the paperwork to withdraw money from the annuity to pay the higher premium, on which he received a much higher commission. Subsequently, the fraud was discovered, and New York Life was the subject of a $15 million punitive damage award in favor of the annuity holder.

The agent engaged in the fraud claimed that management had knowledge of and encouraged the practice of converting policies, "reassuring agents that if they were caught, they could simply apologize for a clerical error and restore the customer's policies." The only testimony that linked Mr. Dawson directly to the fraudulent activity was the agent's claim that Mr. Dawson had directed agents to "share their commissions so underperforming agents could be eligible for some of New York Life's benefits and incentives."

After the $15 million verdict in favor of the annuity holder, New York Life fired Mr. Dawson. Top officials of New York Life then had a meeting with all of the company's general managers. At the meeting, general legal counsel elaborated "on a pattern of unethical behavior in the Corpus Christi office" by "previous management." In addition, the managers' meeting and speeches were videotaped and mailed around the country for the purpose of training agents and employees. The videotapes contained some remarks that referred indirectly to Mr. Dawson.

New York Life then filed a Form U-5 with the National Assn. of Securities Dealers, as is required when a registered agent leaves a firm. In the space on the form labeled "reason for termination," New York Life recorded "failure to follow rules and procedures of New York Life Insurance Co." New York Life subsequently filed an amended U-5 indicating Mr. Dawson was the subject of a "consumer complaint." The company stated on the disclosure reporting page attached to the form that Mr. Dawson "allegedly condoned forgery of customer's name to pay $300 premium needed to convert term insurance policy to whole life, and allegedly informed persons who committed the forgery of customer's name to pay the $300 premium needed to convert term insurance to whole life and condoned other alleged forgeries."

New York Life subsequently filed a second amended Form U-5 involving the agent's fraudulent behavior and Mr. Dawson's supervision based on another customer complaint.

Mr. Dawson sued New York Life, alleging defamation based on the statements on the Form U-5 and attachments as well as those made at the managers' meeting. After a month-long jury trial, the jury awarded Mr. Dawson $200,000 for defamation on the first amended U-5, $100,000 for defamation on the second amended U-5, $1 million for the defamation at the managers' meeting, and $5 million in punitive damages.

New York Life appealed on the basis that, among other things, the jury instruction on reckless disregard of reputation was inadequate. Further, New York Life claimed it had an absolute privilege against a defamation claim for statements made to the NASD.

The court of appeals rejected New York Life's absolute privilege claim. The appeals court agreed with the lower court that only a qualified immunity existed for such statements unless Mr. Dawson could show that New York Life acted with "reckless disregard" of his rights.

The appeals court remanded the case for a new trial on the basis that the jury instruction on reckless disregard was incorrect.

What is the message from these cases? Employees at all levels are tiring of malicious gossip-mongering and the false or misleading statements that can damage a reputation or result in an employee's termination. Preserving an employee's good reputation is essential in an increasingly competitive, even nasty, workplace, where envious co-workers or disgruntled subordinates may use false and misleading statements to sabotage a fellow employee's career. Employees subjected to defamation, whether within or without the corporation, are no longer taking it lying down. And not only will the errant co-workers be challenged, but the company may pay as well.

Also, if a company decides to pick a scapegoat for a major blunder, statements made about him or her are at the company's peril. Information listed even on official government forms regarding the employee is not automatically privileged. It's important, therefore, to watch what is said about the departed employee, both in writing and at internal meetings.

Here are some tips to reduce employer exposure to the claims of defamed employees:

* Formulate a written company policy on office gossip and use it to create a corporate culture in which negative talk and rumor are not acceptable.

* Advise managers to be wary of the motives of employees who volunteer harmful information about their co-workers.

* Should harmful information about an employee surface, make sure a complete, careful and quiet investigation is performed. The process should be carried out by an objective investigating unit, such as the human resources or legal department, and not by a boss or coworker who might have a hidden agenda.

* Set the tone at the top. Most gossip wouldn't exist if someone weren't listening to it. When top management requires a gossip monger to support statements with facts or to keep quiet, lower-level employees usually get the message and quickly stop the negative comments altogether.

* If at all possible, try to ensure that once an employee leaves, even if not on good terms, nothing is said about that person.