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Cummins v. Suntrust Capital Markets

August 20, 2009


The opinion of the court was delivered by: John G. Koeltl, District Judge

Opinion and Order

This is an action for defamation arising out of two analyst reports and related statements to the media criticizing the issuance of certain options to Robert P. "Skip" Cummins, the former Chief Executive Officer ("CEO") of Cyberonics, Inc. ("Cyberonics"), and other Cyberonics executives. The gist of the analyst reports and related statements was that the option grants were timed to exploit information favorable to Cyberonics that ordinary shareholders of the company could not exploit. The analyst reports and related statements characterized the option grants as unethical and self-interested, and compared them in effect to illegal backdating.

Mr. Cummins (the "plaintiff") brings this litigation against the authors of the analyst reports, Amit Hazan and Jonathan Block, and their employer, SunTrust Capital Markets, Inc. (the "defendants"), alleging that the analyst reports contained defamatory statements and were defamatory as a whole, and that related statements made by defendant Hazan to the media were defamatory. The defendants move for summary judgment.


The standard for granting summary judgment is well established. Summary judgment may not be granted unless "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Gallo v. Prudential Residential Servs. Ltd. P'ship, 22 F.3d 1219, 1223 (2d Cir. 1994). "[T]he trial court's task at the summary judgment motion stage of the litigation is carefully limited to discerning whether there are genuine issues of material fact to be tried, not to deciding them. Its duty, in short, is confined at this point to issue-finding; it does not extend to issue-resolution." Gallo, 22 F.3d at 1224. The moving party bears the initial burden of informing the district court of the basis for its motion and identifying the matter that it believes demonstrates the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The substantive law governing the case will identify those facts that are material and "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

Summary judgment is appropriate if it appears that the non-moving party cannot prove an element that is essential to the non-moving party's case and on which it will bear the burden of proof at trial. See Cleveland v. Policy Mgmt. Sys. Corp., 526 U.S. 795, 805-06 (1999); Celotex, 477 U.S. at 322; Powell v. Nat'l Bd. of Med. Exam'rs, 364 F.3d 79, 84 (2d Cir. 2004). In determining whether summary judgment is appropriate, a court must resolve all ambiguities and draw all reasonable inferences against the moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)); see also Gallo, 22 F.3d at 1223. Summary judgment is improper if there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the nonmoving party. See Chambers v. T.R.M. Copy Ctrs. Corp., 43 F.3d 29, 37 (2d Cir. 1994). If the moving party meets its initial burden of showing a lack of a material issue of fact, the burden shifts to the nonmoving party to come forward with "specific facts showing a genuine issue for trial." Fed. R. Civ. P. 56(e)(2). The non-moving party must produce evidence in the record and "may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible." Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir. 1993); see also Scotto v. Almenas, 143 F.3d 105, 114-15 (2d Cir. 1998); Singh v. New York City Off-Track Betting Corp., No. 03 Civ. 5238, 2005 WL 1354038, at *1 (S.D.N.Y. June 8, 2005).


The following facts are undisputed unless otherwise indicated.

At the time of the analyst reports and the related statements to the media at issue in this case, defendants Hazan and Block were equity research analysts at SunTrust Capital Markets, Inc. ("SunTrust"), a subsidiary of a bank holding company. (Defendants' Local Rule 56.1 Statement of Material Facts ("Defts.' 56.1 Stmt.") ¶ 25; Plaintiff's Local Rule 56.1 Statement of Material Facts ("Pl.'s 56.1 Stmt.") ¶ 25.) In their capacity as analysts at SunTrust, defendants Hazan and Block wrote analyst reports about the companies they covered. (Defts.' 56.1 Stmt. ¶ 25; Pl.'s 56.1 Stmt. ¶ 25.) One of those companies was Cyberonics, a company that designs, develops and markets implantable medical devices for the treatment of patients with chronic illnesses who have not responded to traditional drugs and therapies. (Defts.' 56.1 Stmt. ¶ 27; Pl.'s 56.1 Stmt. ¶ 27.)

In 2006, defendants Hazan and Block were asked by their supervisor at SunTrust, Rick Inskeep, to investigate the companies they covered for improper option grants. (Defts.' 56.1 Stmt. ¶ 26; Pl.'s 56.1 Stmt. ¶ 26.) On June 8 and June 12, 2006, SunTrust published two analyst reports written by defendants Hazan and Block on the subject of certain option grants at Cyberonics. (Pl.'s Exs. 1 & 2.) The core facts surrounding those options grants are not in dispute. On June 14, 2004, Cyberonics' stock price at the close of trading was $19.58. (Defts.' 56.1 Stmt. ¶ 29; Pl.'s 56.1 Stmt. ¶ 29.) On June 15, 2004, NASDAQ trading in Cyberonics stock was suspended for the entire day. June 15, 2004 was the date of a Food and Drug Administration ("FDA") panel proceeding concerning a therapy for depression developed by Cyberonics. Late in the day, the panel voted to recommend the therapy. (Defts.' 56.1 Stmt. ¶ 30; Pl.'s 56.1 Stmt. ¶ 30.) That same evening, while trading was still suspended, Cyberonics held a previously scheduled board meeting. (Pl.'s 56.1 Stmt. ¶ 31; Tr. 35-36.)*fn1

At that meeting, after the plaintiff excused himself from the meeting, the Cyberonics board of directors granted 150,000 stock options to the plaintiff and 100,000 stock options to other executives they considered responsible for the positive panel recommendation. (Defts.' 56.1 Stmt. ¶ 31; Pl.'s 56.1 Stmt. ¶ 31; Tr. 35.) The plaintiff was informed that same evening of the award of stock options to him and to the other executives. (Tr. 35; Pl.'s Apr. 14, 2009 Letter Br. ¶ 2 ("The fact that Mr. Cummins was told after the June 15, 2004 board meeting that he was granted options and that he knew the stock price would go up by some amount . . . .").) The plaintiff was also given the responsibility of allocating the 100,000 stock options granted to the other executives among those executives. (Defts.' 56.1 Stmt. ¶ 31; Pl.'s 56.1 Stmt. ¶ 31.)

All of the stock options issued on June 15 carried the June 14 closing price of $19.58. (Defts.' 56.1 Stmt. ¶ 32; Pl.' 56.1 Stmt. ¶ 32.) The June 14 closing price was the most recent closing price because trading was suspended on June 15. The plaintiff knew, on the evening of June 15, that Cyberonics stock would rise the next day due to the favorable FDA panel recommendation. (Pl.'s Apr. 14, 2009 Letter Br. ¶ 2.) The share price did rise the next day by 78%, closing at $34.81. The value of the plaintiff's options, which had not yet vested,*fn2 increased by approximately $2.3 million. (Defts.' 56.1 Stmt. ¶ 33; Pl.'s 56.1 Stmt. ¶ 33.)

The circumstances of the June 15, 2004 option grants formed the primary subject of the June 8 and June 12, 2006 analyst reports written by defendants Hazan and Block and published by SunTrust. (Pl.'s Ex. 1 & 2.) The subject heading of the June 8 analyst report was: "CYBX: Moving to Neutral on Option Grant Concerns & Reimbursement Delays." (Pl.'s Ex. 1.)*fn3 The June 8 report indicated at the outset that the authors were lowering their rating on Cyberonics from "buy" to "neutral" because "the company's stock option grants in 2004 may face meaningful scrutiny in the current environment surrounding option grants . . . ." The report contained a brief "Summary" section that was a summary and preview of a longer "Comments" section that developed everything that was included in the "Summary" section. The report characterized the June 15, 2004 option grants at Cyberonics as "unusual activity." The authors presented the following information in a section of "facts" at the beginning of the "Comments" section:

1. June 14th, 2004 -- the stock closed at $19.58.

2. June 15th, 2004 -- the stock was halted for the entire day during FDA Panel proceedings for VNS therapy for depression (which resulted in a positive recommendation at about 4 p.m.).

3. June 15th (evening), 2004 -- stock options were issued to three executives (immediately following the Panel decision), during a board meeting held that night. Skip Cummins (CEO) received an option grant of 150,000 shares, and Richard Rudolph (VP, CMO) and Alan Totah (VP) each received grants of 10,000 options. All of these options carried the June 14th closing price of $19.58. [Emphasis in original.]

4. June 16th, 2004 -- on the first trading day following the positive FDA Panel recommendation, CYBX jumped 78% to close at $34.81, yielding an overnight paper profit of ~$2.3 million for CEO Cummins, and ~$150,000 each for Rudolph and Totah.

5. February 2005 -- Mr. Cummins sold ~350,000 options at ~$40-45 per share (the selling began just days after CYBX received an FDA approvable letter for the same device). Both Rudolph and Totah sold options at around ~$36 per share since the Panel approval in June '04. (Pl.'s Ex. 1.)

Following this presentation of "facts," the authors compared the "effect" of the June 15 options to the effect of backdated options, and suggested that it "seemed clear" that like backdated options, the June 15 options were "'in the money' options that would require an immediate recording of compensation expense (which could possibly necessitate a restatement of FY05 results)." (Pl.'s Ex. 1.)*fn4 The authors did not say that the options granted on June 15 were backdated, noting that it was "disputable" and that "it appears to us that even if backdating by definition did not occur, the effect was exactly the same." (Pl.'s Ex. 1) (emphasis in original).

The authors proceeded to note that they were "unable to locate all of the electronic Form 4's for the quarter in question . . . [and] are continuing to do diligence surrounding this issue." (Pl.'s Ex. 1.)

In the final paragraph about the June 15 options, the authors asserted that the options reflected poorly on the credibility of Cyberonics management, even though "this option granting issue may never develop into a legal event for the company." The authors stated that "we feel it is unfortunately another clear hit to this management's credibility," and made reference to pre-existing criticism of the credibility of Cyberonics management. The authors concluded that "[l]egal or not, we are hard pressed to find a justifiable reason for the events that unfolded above." (Pl.'s Ex. 1.)

On June 9, 2006, the Securities and Exchange Commission (the "SEC") launched an internal investigation of Cyberonics. (Defts.' 56.1 Stmt. ¶ 8; Pl.'s 56.1 Stmt. ¶ 8.) On June 12, 2006, SunTrust published a second analyst report by defendants Hazan and Block. The subject heading of the June 12 report was: "CYBX: SEC Launches Informal Probe into Option Grants." Like the June 8 report, the June 12 report contained a "Summary" section that was a preview and summary of a longer "Comments" section that developed everything included in the "Summary" section. The authors structured the discussion in the "Comments" section of the June 12 report into three parts, under the following subheadings: "SEC Contacts CYBX," "We Fully Stand by Our Claim," and "Credibility is the Real Issue."*fn5 (Pl.'s Ex. 2.)

In the first part of the discussion, the authors noted that the SEC investigation into Cyberonics that began on June 9 "highlights a concern" raised in the authors' June 8 analyst report. The authors then summarized the "facts" set forth in the June 8 report: "Specifically, 170,000 options were granted that night [of June 15, 2004], just a few hours after a very controversial FDA Panel voted to approve VNS therapy for depression. With a full understanding of the materiality of the event (this was undoubtedly the single greatest event in the company's history), this management and board of directors granted the options with a prior day's (June 14th) exercise price of $19.58. The stock rose 78% on June 16, yielding the executives a combined overnight paper profit of ~$2.5M." (Pl.'s Ex. 2.)

In the second part of the discussion, the authors sought to "further clarify" the "claim" they made in the June 8 report. The authors explained that their claim was that the timing of the June 15 option grants (which occurred in the wake of favorable news for the company on a day when trading was frozen) and the exercise price of the options (which was the previous day's exercise price and did not incorporate the favorable news of the FDA Panel recommendation) reflected that Cyberonics management had acted out of self-interest by taking advantage of "material information at a time when their shareholders and investors could not do so." The authors characterized the behavior of Cyberonics management as "knowingly abus[ing]" the principle that the purpose of stock option grants is to align the interests of management with the interests of the shareholders. The authors did not accuse Cyberonics management of breaking any laws, noting that "the exact letter of the law may very well have been followed . . . ." The authors did say that it "seem[ed] clear to [them]" that the "intent" of the law had been "manipulated," because "the intent of the regulation is to come as close as possible to capturing the 'true' value of the stock," and in light of the FDA Panel recommendation the June 14th share price for Cyberonics was plainly not the true value of Cyberonics stock on June 15th when the options were granted. (Pl.'s Ex. 2.)

In the third part of the discussion, the authors compared the June 15 option grants to "broader stock option incentive compensation abuses" occurring elsewhere, characterizing the June 15 option grants as "akin 'in effect'" to broader stock option abuses. The authors reiterated that while the June 15 option grants may have been legal, they "appear unethical to us . . . ." The authors also made reference to pre-existing "credibility issues" with Cyberonics management and stated that "in our opinion," the value of Cyberonics stock is meaningfully discounted due to the presence of the plaintiff as CEO of the company. The authors concluded by noting that "[a]t the end of the day, shareholders will have to decide whether this management team and its board of directors have fulfilled their fiduciary duty. We are currently hard pressed to reach such a conclusion." (Pl.'s Ex. 2.)

Mr. Hazan sent the June 8, 2006 analyst report to the New York Times. (Pl.'s 56.1 Stmt. ¶ 8; Defts.' Reply 56.1 Stmt. ¶ 8.) On June 9, 2006, the New York Times published an article in its Business Section about the June 15, 2004 issuance of options at Cyberonics. (Pl.'s Ex. 3.) The title of the article was: "Questions Raised on Another Chief's Stock Options," and the article contained a picture of the plaintiff with a caption identifying him as the CEO of Cyberonics. The article quoted Mr. Hazan saying: "My problem is the timing of when they [issued the options]. The fact that [the options do not] vest immediately doesn't mean it was ethical, and I haven't heard from one institutional investor today who disagrees with me." The article also quoted Mr. Hazan saying: "It's a perfect example of an abusive option." (Pl.'s Ex. 3.)

On June 9, 2006, published an article to the effect that Cyberonics was disputing the June 8, 2006 analyst report. (Pl.'s Ex. 5.) The title of the article was: "Cyberonics Disputes Analyst Comments on Option Grants." The article quoted Mr. Hazan saying in an email: "[I]t appears unjustified and unethical to issue those grants on the night of the single greatest event in the company's history." (Pl.'s Ex. 5.)

Mr. Hazan also gave an interview to the Houston Chronicle. On June 14, 2006, the Houston Chronicle published an article about the June 15, 2004 option grants. The article quoted Mr. Hazan saying, with respect to the option grants: "It was not correct or ethical for them to do what they did . . . . It may be a microcosm of what's happening with this management team." (Pl.'s Ex. 4.) The article also summarized the circumstances surrounding the June 15 option grants that were presented as 'facts' in the June 8 analyst report (and reproduced at the outset of the June 12 analyst report), and noted that "Hazan estimates by granting the options when it did, the company gave Cummins a $2.3 million boost, at least on paper, and about $150,000 each for the other two executives." (Pl.'s Ex. 4.)

Prior to the publication of the June 8 analyst report, defendants Hazan and Block consulted with David Prince, the chief legal officer at SunTrust. (Pl.'s Ex. 7 ("Prince Dep.") at 143, 149-54.) The substance of the consultation was the information presented in the section of 'facts' in the June 8 report, although Mr. Prince does not recall discussing the plaintiff's February 2005 sale of shares or the use of the term "paper profit" with defendants Hazan and Block. (Prince Dep. 158-59, 175-76.) The consultation took place over two telephone calls of approximately 11.5 and 5.5 minutes each. (Prince Dep. 49-50, 82-83.) Mr. Prince told defendants Hazan and Block that they had a reasonable basis to believe there were accounting issues with the June 15, 2004 options grants. (Prince Dep. 159-60.) He also told them that he felt the SEC would consider "what happened here improper," and he told them about a National Association of Securities Dealers ("NASD") regulation that was a catchall regulation that functions "almost like an ethical standard" and "underlies everything that a broker-dealer does."

(Prince Dep. 160-61.)*fn6 Defendants Hazan and Block did not consult with Mr. Prince about various statements made in the June 8 analyst report that followed the section of 'facts,' including the statements about whether the option grants should require the immediate recording of compensation expense. (Prince Dep. 176-77.) Mr. Prince did not recall defendants Hazan and Block consulting with him about the June 12 analyst report. (Prince Dep. 179-80.)*fn7

On November 9, 2006, the Cyberonics board of directors decided to ask the plaintiff to resign. (Defts.' 56.1 Stmt. ¶ 14; Pl.'s 56.1 Stmt. ¶ 14.) The plaintiff resigned on November 20, 2006. (Defts.' 56.1 Stmt. ¶¶ 18-19; Pl.'s 56.1 Stmt. ¶¶ 18-19.) The June 8 and June 12 analyst reports were not discussed in the course of the November 9 board meeting at which the board of directors reached the decision to ask for the plaintiff's resignation. (Defts.' 56.1 Stmt. ¶ 15; Pl.'s 56.1 Stmt. ¶ 15.) However, the publicity generated by the analyst reports contributed to the decision to ask for the plaintiff's resignation. (Pl.'s Ex. 23 ("Coelho Dep.") at 148-50.)


Pursuant to the Court's instructions, the plaintiff submitted a chart listing each allegedly defamatory statement in the analyst reports and the related statements to the New York Times,, and the Houston Chronicle, and explaining why each statement listed was defamatory. The plaintiff identified thirty-seven (37) allegedly defamatory statements, many of which were overlapping or duplicative, and also alleged that the analyst reports were defamatory as a whole. The arguments underlying many of the allegations of defamation include: the statement falsely implied that the plaintiff participated in issuing the June 15, 2004 options; the statement falsely implied that the plaintiff participated in illegally backdating the options; and the statement falsely indicated that the options had to be recorded immediately as a compensation expense. The defendants submitted a responsive chart asserting specific defenses with respect to each of the 37 allegedly defamatory statements. The defenses underlying much of the responsive chart include: the statement was substantially true; the statement was one of opinion rather than fact; and the statement was not "of and concerning" the plaintiff.

The Court has reviewed each of the allegedly defamatory statements in the context in which it was made, and all of the parties' arguments with respect to whether each statement was defamatory and whether the analyst reports were defamatory as a whole. The Court has also reviewed the voluminous submissions by both parties. For the reasons explained below, the statements identified by the plaintiff were not defamatory and summary judgment should be granted.


There is a threshold issue of determining what substantive law to apply to the plaintiff's claims. The plaintiff insists on the application of Texas law (Tr. 85-87) while the defendants argue for the application of New York law (Tr. 99-101.)

"A federal court sitting in diversity applies the choice of law rules of the forum state." Lee v. Bankers Trust Co., 166 F.3d 540, 545 (2d Cir. 1999); see also Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); Beth Israel Med. v. Horizon Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 582 (2d Cir. 2006); Interstate Foods, Inc. v. Lehmann, No. 06 Civ. 13469, 2008 WL 4443850, at *2 (S.D.N.Y. Sept. 30, 2008). In determining the applicable law for tort claims, "New York applies the law of the state with the most significant interest in the litigation." Lee, 166 F.3d at 545; Padula v. Lilarn Props. Corp., 644 N.E.2d 1001, 1002 (N.Y. 1994). In weighing the interests of the jurisdictions, New York distinguishes between "conduct regulating" and "loss allocating" rules. Lee, 166 F.3d at 545; Schultz v. Boy Scouts of Am., Inc., 480 N.E.2d 679, 684-85 (N.Y. 1985); see also Neumeier v. Kuehner, 286 N.E.2d 454, 457-58 (N.Y. 1972). Where the rule at issue is primarily conduct regulating, "the law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders." Padula, 644 N.E.2d at 1002 (quoting Cooney v. Osgood Mach., 612 N.E.2d 277, 280 (N.Y. 1993)). See also Berwick v. New World Network Int'l, Ltd., No. 06 Civ. 2641, 2007 WL 949767, at *7 (S.D.N.Y. Mar. 28, 2007).

"Discouraging defamation is a conduct regulating rule." Lee, 166 F.3d at 545. In cases involving allegations of defamation, New York courts usually find that the state of the plaintiff's domicile has the most significant relationship to the case, "assuming that the defamation was published in the plaintiff's state, because plaintiff's home state is where a plaintiff's reputation is most likely damaged." La Luna Enters., Inc. v. CBS Corp., 74 F. Supp. 2d 384, 388 (S.D.N.Y. 1999). However, this preference is not conclusive, and where the allegedly defamatory material has been published in more than one state, courts have looked to multiple factors to determine the applicable law, including "the plaintiff's domicile, the location of the plaintiff's activity which gave rise to the alleged defamation, the defendants' domicile, and the place from which publication of the allegedly defamatory statements occurred." Qureshi v. St. Barnabas Hosp. Ctr., 430 F. Supp. 2d 279, 286 n.3 (S.D.N.Y. 2006).

In this case, the plaintiff's home state is Texas (Compl. ¶ 3), the plaintiff represents that his employer, Cyberonics, is located in Texas (Tr. 86), and Cyberonics itself represents that it is headquartered in Texas (see ("Headquartered in Houston, Texas")). Because the plaintiff's allegations of damages center around the loss of his job at Cyberonics and injury to his professional reputation (Compl. ¶¶ 79-81), the alleged defamation in this case plainly has the biggest impact in Texas. Moreover, the activity giving rise to the alleged defamation took place in the course of a Cyberonics board meeting, although the plaintiff appears to have participated in the meeting telephonically. In addition, there is no dispute that allegedly defamatory statements were published in Texas.*fn8

Based on these facts, and despite the fact that the defendants have connections to New York, Texas is the forum with the greatest interest in this litigation, and the law of Texas is the applicable substantive law in this case. See, e.g., La Luna, 74 F. Supp. 2d at 389 (applying Florida law despite New York having "some interest in this litigation because defendants are citizens of New York"); cf. Berwick, 2007 WL 949767, at *7-8 (applying New York law over law of plaintiffs' home state in defamation suit where there was no allegation that any tortious statements were published in plaintiffs' home state; no allegation that any person or entity in plaintiffs' home state had ever heard or read disparaging remarks about plaintiffs; plaintiffs' relevant business dealings took place in New York; and plaintiffs' allegations of harm in their home state were "conclusory").


"To maintain a defamation cause of action, the plaintiff must prove that the defendant: (1) published a statement; (2) that was defamatory concerning the plaintiff; (3) while acting with either actual malice, if the plaintiff was a public official or public figure, or negligence, if the plaintiff was a private individual, regarding the truth of the statement." WFAA-TV, Inc. v. McLemore, 978 S.W.2d 568, 571 (Tex. 1998); see also, e.g., Abdel-Hafiz v. ABC, Inc., 240 S.W.3d 492, 505 (Tex. Ct. App. 2007). "Under Texas law, a statement is defamatory if it tends to injure a person's reputation and thereby expose the person to public hatred, contempt, ridicule, or financial injury or to impeach any person's honesty, integrity, virtue, or reputation." Tex. Disposal Sys. Landfill, Inc. v. Waste Mgmt. Holdings, Inc., 219 S.W.3d 563, 580 (Tex. Ct. App. 2007); see also Montemayor v. Ortiz, 208 S.W.3d 627, 651 (Tex. Ct. App. 2006). "[A]llegedly [defamatory] statements must be construed 'as a whole in light of surrounding circumstances based upon how a person of ordinary intelligence would perceive the entire statement.'" Cram Roofing Co., Inc. v. Parker, 131 S.W.3d 84, 90 (Tex. Ct. App. 2003) (quoting Musser v. Smith Protective Servs., Inc., 723 S.W.2d 653, 655 (Tex. 1987)); see also Bentley v. Bunton, 94 S.W.3d 561, 579 (Tex. 2002).

"Defamatory statements are 'published' if they are communicated orally, in writing, or in print to some third person capable of understanding their defamatory import and in such a way that the third person did so understand." Wells v. Johnson, No. 11-99-72-cv, 2000 WL 34234888, at *1 (Tex. Ct. App. Oct. 26, 2000) (collecting cases). Defamation in written or printed form is also known as "libel." See, e.g., AccuBanc Mortg. Corp. v. Drummonds, 938 S.W.2d 135, 147 (Tex. Ct. App. 1996).

"Under . . . Texas law, an essential element of a defamation claim is that the publication is 'of and concerning' the plaintiff." Houseman v. Publicaciones Paso del Norte, S.A. de C.V., 242 S.W.3d 518, 526 (Tex. Ct. App. 2007) (internal quotation marks omitted). "A publication is 'of and concerning' the plaintiff if persons who knew and were acquainted with him understood from viewing the publication that the defamatory matter referred to him." Id. at 525. "It isn't necessary that the plaintiff be named in the publication." Id. However, "[t]he false statement must point to the plaintiff and no one else." Id.; see also Newspapers, Inc. v. Matthews, 339 S.W.2d 890, 894 (Tex. 1960) ("The settled law requires that the false statement point to the plaintiff and no one else."); Texas Beef Group v. Winfrey, 11 F. Supp. 2d 858, 864 (N.D. Tex. 1998).

The plaintiff in this case alleges that the defendants' statements were defamatory per se. "[S]tatements that are defamatory per se are actionable without proof of injury." Tex. Disposal Sys., 219 S.W.3d at 580. "A false statement will typically be classified as defamatory per se if it injures a person in his office, profession, or occupation, [or] charges a person with the commission of a crime . . . ." Id. at 581 (internal citation omitted). If statements are not classified as defamatory per se, they "are actionable only upon allegation and proof of damages." Id. at 580. Moreover, "[e]ven if the statements have been determined to constitute defamation per se, proof of the actual injury suffered is required to recover special damages such as lost profits, incurred costs, lost time value, and future injury . . . ." Id. at 581 n.19. The plaintiff seeks damages of that nature in this case. (See, e.g., Compl. ¶ 81.)


The "substantial truth" of an allegedly defamatory statement is sufficient to defeat a defamation claim. See Austin v. Inet Tech., Inc., 118 S.W.3d 491, 496 (Tex. Ct. App. 2003); see also McIlvain v. Jacobs, 794 S.W.2d 14, 15 (Tex. 1990). Under the rubric of substantial truth, "[i]f a statement has the same effect on the mind of the average reader as a true statement, then it is not false. If the article correctly conveys the story's gist but relayed certain details incorrectly, the article will be considered substantially true." Pardo v. Simons, 148 S.W.3d 181, 186-87 (Tex. Ct. App. 2004) (internal citation omitted); see also Hearst Newspaper P'ship, LP v. Macias, 283 S.W.3d 8, 11 (Tex. Ct. App. 2009) ("The test used in determining whether a publication is substantially true involves considering whether the alleged defamatory statement was more damaging to the plaintiff's reputation, in the mind of the average reader or listener, than a truthful statement would have been. Such an evaluation involves looking to the 'gist' of the publication.") (internal citations omitted).

Expressions of opinion do not give rise to liability for defamation. See Brown v. Swett & Crawford of Texas, Inc., 178 S.W.3d 373, 383 (Tex. Ct. App. 2005) ("[T]he plaintiff must prove that the statements contained false, defamatory facts rather than opinions or characterizations. Whether a statement is an opinion or an assertion of fact is a question of law. An alleged defamatory statement of opinion requires an implication of undisclosed facts to be actionable.") (internal citations omitted). There is no rigid dichotomy distinguishing statements of fact from expressions of opinion. See Bentley, 94 S.W.3d at 580 (citing Milkovich v. Lorain Journal Co., 497 U.S. 1 (1990)). Rather, whether allegedly defamatory statements are "statements of fact or expressions of opinion depends . . . on their verifiability and the context in which they were made."

Bentley, 94 S.W.3d at 583 (citing Milkovich, 497 U.S. at 1); see also Linan v. Strafco, Inc., No. 13-05-27-cv, 2006 WL 1766204, at *4 (Tex. Ct. App. June 29, 2006) ("The court must construe the statement at issue as a whole, in light of surrounding circumstances based upon how a person of ordinary intelligence would perceive the entire statement."); Ridha v. Texas A&M Univ. Sys., No. 08 Civ. 2814, 2009 WL 1406355, at *7 (S.D. Tex. May 15, 2009) ("When determining whether a statement is an actionable statement of fact or a constitutionally protected opinion, a court must consider whether the statement in question makes or implies a factual assertion that is objectively verifiable. In so doing, the court is to consider the entire context in which the statement was made.").


The parties dispute whether the plaintiff is a public figure for purposes of this litigation. The plaintiff insists that he is not a public figure, while the defendants argue that he is a limited purpose public figure. If the plaintiff is a public figure, the plaintiff must establish that the allegedly defamatory statements were published with the "actual malice" standard defined in New York Times Co. v. Sullivan, 376 U.S. 254, 279-80 (1964). See Gertz v. Robert Welsh, Inc., 418 U.S. 323, 342 (1974); Curtis Publ'g Co. v. Butts, 388 U.S. 130, 162-63 (1967). If the plaintiff is not a public figure, then the plaintiff must establish that the statements were published negligently. Durham v. Cannan Comm'cns, Inc., 645 S.W.2d 845, 851 (Tex. Ct. App. 1982).

"Whether a party is a public figure is a matter of constitutional law for the court to decide." Allied Mktg. Group, Inc. v. Paramount Pictures Corp., 111 S.W.3d 168, 177 (Tex. Ct. App. 2003). However, although whether a person is a public figure "is a question of federal constitutional law and Supreme Court rulings are controlling," in a diversity action "resort to [the applicable state] case law is appropriate" because "states are entitled to provide a broader, though no more constricted, meaning to public figures" than federal law provides. Harris v. Quadracci, 48 F.3d 247, 250 n.5 (7th Cir. 1995) (applying Wisconsin state law to determine whether plaintiff was public figure); see also Lee v. City of Rochester, 663 N.Y.S.2d 738, 769 (Sup. Ct. 1997), aff'd, 677 N.Y.S.2d 848 (App. Div. 1998) (consulting both state common law and federal law in making public figure determination). Therefore, the Court considers federal law and Texas state law to determine whether the plaintiff is a public figure.

The Supreme Court has defined two classes of public figures, general and limited. Contemporary Mission, Inc. v. New York Times Co., 665 F. Supp. 248, 262 (S.D.N.Y. 1987), aff'd, 842 F.2d 612 (2d Cir. 1988). The class of general public figures includes only those individuals who have achieved "general fame or notoriety in the community, and persuasive involvement in the affairs of society." Gertz, 418 U.S. at 352. The class of limited purpose public figures consists of individuals who "voluntarily inject[] [themselves] or [are] drawn into a particular public controversy and thereby become [] public figure[s] for a limited range of issues." Id. at 351. "In either case such persons assume special prominence in the resolution of public questions." Id.

The defendants concede that the plaintiff is not a general public figure, but argue that he is a limited purpose public figure. Under federal law as it has been interpreted in this Circuit, in order to establish that a plaintiff is a limited purpose public figure a defendant must show the plaintiff has: "(1) successfully invited public attention to his views in an effort to influence others prior to the incident that is the subject of litigation; (2) voluntarily injected himself into a public controversy related to the subject of the litigation; (3) assumed a position of prominence in the public controversy; and (4) maintained regular and continuing access to the media." Contemporary Mission, Inc., 842 F.2d at 617. Texas state courts apply a slightly different test although both parties urge that it is substantially the same as the test used by federal courts in this Circuit. The test has three parts: "(1) the controversy at issue must be public both in the sense that people are discussing it and people other than the immediate participants in the controversy are likely to feel the impact of its resolution; (2) the plaintiff must have more than a trivial or tangential role in the controversy; and (3) the alleged defamation must be germane to the plaintiff's participation in the controversy." WFAA-TV, 978 S.W.2d at 571.

The defendants argue that the plaintiff is a limited purpose public figure based on his involvement in two separate controversies: a national controversy over stock option backdating and a national controversy regarding the plaintiff's leadership of Cyberonics. Neither argument supports a finding that the plaintiff is a limited purpose public figure.

At the time of the June 8 and June 12, 2006 analyst reports, the plaintiff was not involved in any public controversy regarding stock option backdating or, more broadly, improper option grants. First, the record is far from clear that there existed any public controversy at the time regarding improper option grants. "A public 'controversy' is any topic upon which sizeable segments of society have different, strongly held views." Lerman v. Flynt Distrib. Co., Inc., 745 F.2d 123, 138 (2d Cir. 1984); see also WFAA-TV, 978 S.W.2d at 571. The defendants argue that a series of twenty newspaper articles in The Wall Street Journal on the subject establishes that a public controversy existed regarding improper option grants. (Defts.' Ex. 1.) However, only three such articles were published before the analyst reports at issue in this case. The defendants nowhere argue that those three articles from a single publication were sufficient to establish a public controversy, and indeed the number pales in comparison to the press coverage found to establish a public controversy in other cases. Cf. Contemporary Mission, 842 F.2d at 618 ("Over 200 news articles about [plaintiffs] from more than 60 different publications located in over 15 different states . . . were submitted to the district court . . . ."); Swate v. Schiffers, 975 S.W.2d 70, 74-76 (Tex. Ct. App. 1998) (finding that plaintiff was public figure based on 24 newspaper articles about the plaintiff on the same subject of his medical practice that was the basis for the alleged defamation); Brueggemeyer v. ABC, Inc., 684 F. Supp. 452, 456-57 (N.D. Tex. 1988) (listing newspaper articles).

In any event, whether the three articles from the Wall Street Journal establish any public controversy regarding improper stock option grants is not a question the Court need decide, because the plaintiff "at no time assumed any role of public prominence in the broad question of concern about" option grants. Hutchinson v. Proxmire, 443 U.S. 111, 135 (1979). Nothing in the record links the limited pre-existing press coverage of stock option practices to the plaintiff or Cyberonics, and therefore the plaintiff was not a public figure for purposes of comment on improper stock option practices. Cf. Pisani v. Staten Island Univ. Hosp., No. 06 Civ. 1016, 2008 WL 1771922, at *16 (E.D.N.Y. Apr. 15, 2008) ("Defendants have failed to cite any facts showing that [plaintiff's] prominence was related to the topic of the [allegedly defamatory] statement."); Durham, 645 S.W.2d at 850-51 (finding that plaintiff at forefront of public controversy surrounding alleged mismanagement of public funds was not public figure for purposes of comment on his alleged connection to other allegedly illegal activities). The existence of a broad public controversy concerning stock option practices that was never tied to the plaintiff or Cyberonics prior to the publication of the analyst reports would not sufficiently implicate the plaintiff for purposes of considering him a limited purpose public figure. See Hutchinson, 443 U.S. at 134-36 (finding that plaintiff was not limited purpose public figure for purposes of comment on his receipt of federal funds on the basis of prevailing concern "shared by most" about general public expenditures, and explaining that plaintiff "at no time assumed any role of public prominence in the broad question of concern about expenditures"); see also Calvin Klein Trademark Trust v. Wachner, 129 F. Supp. 2d 248, 252 (S.D.N.Y. 2001) (framing public controversy inquiry in terms of whether there was public controversy specifically concerning defamation counterclaimant's conduct, rather than whether any controversy existed generally about conduct of that nature). Finding the plaintiff to be a public figure on the basis of a broad public controversy about stock option practices, assuming such a controversy existed at the time, would effectively require finding that every executive receiving stock options was a public figure for purposes of critical comment concerning those options. See Hutchinson, 443 U.S. at 134-36 ("If [the concern about public expenditures] were [sufficient to make the plaintiff a public figure], everyone who received or benefited from the myriad public grants for research could be classified as a public figure . . . .").

The defendants cite a bevy of cases to support the proposition that the existence of a general public controversy about stock option practices would render the plaintiff a public figure. None of those cases supports that proposition. In each of the cases cited by the defendants, the public controversy relative to which the plaintiff was considered a public figure featured the plaintiff in a far more prominent role than the plaintiff could be said to have played in this case. Cf., e.g., Contemporary Mission, 842 F.2d at 618 ("Appellants were plainly limited purpose public figures with respect to the religious controversy surrounding them in the early 1970's."); Lerman, 745 F.2d at 137-38 (finding plaintiff to be limited purpose public figure in connection with controversy over relations between the sexes and public nudity where plaintiff "is today in the forefront of women writing about sex and what is perceived of as a continuing, double-standard in sexual mores . . . . Plaintiff . . . was such a willing participant in this public controversy."); WFAA-TV, 978 S.W.2d at 573 ("The record reflects that [the plaintiff] acted voluntarily to invite public attention and scrutiny on several occasions and in several different ways during the course of the public debate . . . ."); Swate, 975 S.W.2d at 74 ("[T]he earlier newspaper articles . . . describe conduct that would have ruined [the ...

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