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October 25, 1991


The opinion of the court was delivered by: Lowe, District Judge.


Before this Court are the motions of defendants Eli Lilly & Co. ("Lilly"), PaineWebber, Inc. ("PaineWebber"), and Ronald Nordmann ("Nordmann") to dismiss the above-captioned action pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons set forth below, the motion of Lilly is granted, and the joint motion of PaineWebber and Nordmann is denied.


Procedural Background

This is an action for defamation brought by Church of Scientology International ("CSI") and Citizens' Commission on Human Rights ("CCHR"). Plaintiffs are nonprofit corporations incorporated in California, having their principal places of business in California. Defendant Lilly is a pharmaceutical company incorporated in Indiana, having its principal place of business in Indiana. Defendant PaineWebber is a stock brokerage and securities firm incorporated in Delaware, having its principal place of business in New York. Defendant Nordmann is a market analyst employed by PaineWebber, and a citizen of New York. Complaint at ¶ 1.

In their Complaint of 10/31/90, plaintiffs allege that defendants defamed them in the total amount of $40,200,000, id. ¶ 39, by publishing two false and defamatory statements, of and concerning plaintiffs, on PaineWebber's database, with reckless disregard for the truth or falsity of the statements. On 12/6/90 defendants PaineWebber and Nordmann filed a motion, pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss the complaint for failure to state a claim for which relief can be granted. Memorandum of Defendants PaineWebber and Nordmann in Support of Their Motion to Dismiss the Complaint ("PaineWebber Memo"). On the same day, defendant Lilly filed a separate motion to dismiss, adopting PaineWebber's grounds and also making an alternate argument of its own. Memorandum of Defendant Lilly in Support of its Motion to Dismiss the Complaint ("Lilly Memo").

On 12/21/90 this Court referred this action to Magistrate Judge Nina Gershon pursuant to 28 U.S.C. § 636(b)(1)(B). In her Report and Recommendation of 3/28/91 ("Report"), Magistrate Judge Gershon advised dismissal of this action in its entirety. Report at 9. Plaintiffs CSI and CCHR filed a timely objection, disputing the reasoning and conclusion of the Magistrate Judge. These objections, along with defendants' responses, are now before this Court.

Under the Federal Rules the District Court is required to make a de novo determination of those issues in the Magistrate Judge's report to which objections are made in writing. "The district judge may accept, reject, or modify the recommended decision, receive further evidence, or recommit the matter to the magistrate with instructions." Fed.R.Civ.P. 72(b). For the reasons discussed below, we affirm the Magistrate Judge's Report with respect to defendant Lilly, but reverse the Report with respect to defendants PaineWebber and Nordmann.

Factual Background

On July 18, 1990 the Wall Street Journal featured an article entitled "Prozac Said to Spur Idea of Suicide," describing the controversy over the anti-depressant medication Prozac, which is manufactured by Lilly. The subject of the article was a lawsuit filed against the drug company, alleging that the drug "caused [a New York woman] to commit acts of self-destruction and to make attempts at suicide." Ex. A to Complaint. The article described "a Los Angeles-based consumer organization associated with the Church of Scientology" which collected the complaints of patients taking Prozac, and subsequently identified this group as CCHR. The article described Lilly's response as "[believing that] some of the complaints are being drummed up by the Scientology group, which has a history of criticizing the use of psychiatric drugs." Id.

The following day, Nordmann, a market analyst for PaineWebber who followed Lilly stock, wrote an Advisory responding to the Journal article and recommending continued purchase of Lilly stock, despite the concern of investors. Complaint at ¶ 9. Plaintiffs allege that Nordmann was acting in the scope of his employment when he authored the statements, and that "the Advisory was prepared for, published by and distributed on PaineWebber's nationwide communications system to PaineWebber's sales personnel, customers and others, and all of PaineWebber's branch offices." Id. ¶¶ 7, 15. The advisory described Prozac's success and Lilly's "highly ethical promotion practices," which included regular updates of package inserts. Ex. B to Complaint. In this context Nordmann wrote the statements of which plaintiffs complain:

  "The final addition to Prozac's package insert in
  May concerned one case of `violent behavior.' In
  this case, a depressed man taking Prozac committed
  mass murder. Interestingly, this man, Mr. Wes
  Becker (sic), happened to be a member of the Church
  of Scientology. The Church and other related
  special interest groups have, in our opinion been
  on a vendetta to discredit Prozac."*fn1 (Emphasis
  According to the Complaint, these statements "were told to Nordmann by an employee of Lilly within the scope of the employee's employment" for the purpose of having Nordmann publish the statements, in order to shore up Lilly's stock in the wake of the worrisome Journal piece. Id. ¶ 10.

Plaintiffs maintain that both these statements are false: Wesbecker was never a member of CSI, and neither plaintiffs nor any other Scientology organization is "on a vendetta" against Lilly's drug. Id. ΒΆΒΆ 12, 13. On ...

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