Damages Awarded in Form U5 Defamation Case Against Allstate

On August 16, 2014, Tilkey was staying with his girlfriend, Mann, and her young grandson in Arizona. After going out for the evening and drinking, the two began to argue, and Tilkey decided to leave the home. When Tilkey stepped outside onto the enclosed patio, Mann closed and locked the patio door, which was a traditional door with glass panes. Tilkey banged on the patio door, demanding to be let back in so he could gather his belongings, which were in the bedroom where Mann's grandson was sleeping. Mann called police. 

When police arrived, Mann told them she did not want Tilkey in the apartment because she was afraid he would wake up her grandson. Police noted the interior trim on the framing above the patio door was broken. 

Officers searched Tilkey's travel bag, which contained marijuana and a plastic container used to smoke marijuana. Police arrested Tilkey and filed three charges against him: criminal damage deface (Arizona Revised Statute [A.R.S.] § 13-1602A1), possession or use of drug paraphernalia (A.R.S. § 13-3415A), and disorderly conduct - disruptive behavior (A.R.S. § 13-2904A1). A domestic violence label was attached to the criminal damage and disorderly conduct charges. 

Not exactly a night that Tilkey likely wishes to remember. Note that a "domestic violence label" was attached to the criminal damage and the disorderly conduct charges. That's an interesting turn of words -- what exactly does it mean when the "label" of domestic violence is "attached" to those two charges? Moreover, what's the significance in attaching such a label but not, you know, actually filing a specific charge of domestic violence? And while you're pondering those questions, go back a re-read the above CACtApp citation. What specific conduct did Tikley allegedly engage in that rose to something akin to "domestic violence?" The argument between him and his girlfriend? His banging on the patio door? The girlfriend's fear that he would awaken her grandson? As you continue to read on, keep those questions and your answers in mind. It will all prove critical as events progress.

pled guilty to the disorderly conduct charge only, and the other two charges were dropped. After Tilkey completed a domestic nonviolence diversion program, the disorderly conduct charge was dismissed. . . 

Let's make careful note of Allstate's explanation for terminating Tilkey after some 30 years of employment: based on his arrest for a domestic violence offense and his participation in the diversion program. Allstate informed Tilkey it was discharging him for threatening behavior and/or acts of physical harm or violence to another person. 

Remember how a few minutes ago we were pondering just what conduct Tilkey had engaged in that rose to the level of attaching the so-called "label" of domestic violence to the charges of criminal damage ad of disorderly conduct? So -- let's re-visit that issue again. When terminating Tilkey, Allstate filed a Uniform Termination Notice for Securities Industry Registration (the "Form U5") in which it reported that he had been arrested for a "domestic violence offense." 

Was Tilkey actually charged with an offense of "Domestic Violence," or, was "Domestic Violence" merely a "label" that was "attached" to the offenses of Criminal Damage and of Disorderly Conduct? Is there, in fact, a difference between an "offense" and an attached "label" of same? After you've resolved that question, consider another puzzle: When Allstate said that it had terminated Tilkey for "threatening behavior and/or acts of physical harm or violence to another person," what behavior and/or acts was the employer citing? Was it the apparent oral argument? Was it the banging on the door? 

On August 31, 2014, Mann sent an e-mail to Tilkey at work mentioning the charges that had been filed against him. A field compliance employee later discovered this e-mail while conducting a routine compliance review and forwarded it to Human Resources (HR). HR professional Tera Alferos conducted the initial investigation; she interviewed Tilkey December 4, 2014. She noted Tilkey had been asked to accept a plea deal to have two of the three charges dropped, then the last one dismissed. She never spoke with Mann or interviewed the arresting officers. She also did not investigate Mann's background or review her social media accounts.

Mann sent an e-mail to Allstate March 3, 2015, which revealed the arrests and made several other allegations. That same day, the e-mail was shared with Harriet Harty, Executive Vice President of HR; Christina Metzger, Vice President of HR; and Tyrone Burno, Director of HR. Alferos added the e-mail to the case file. A couple weeks later, Alferos sent Burno a summary of her investigation, which stated that the police report had been reviewed and noted Tilkey had been charged with but not convicted of a crime. The summary also explained there was no FINRA reporting obligation because there were no felony charges, and it concluded there had been no violation of company policy. 

On March 31, 2015, Alferos provided Burno with a revised summary of investigation that added that Tilkey had entered a diversion program for the disorderly conduct (domestic violence) charge, resulting in a deferred prosecution. Burno then changed the conclusion to state Tilkey's behavior may have been at a level that caused the company to lose confidence in him. Burno supplied this version of the summary of investigation to Metzger, Harty, and Greg Burns, the senior vice president of HR, the same day. 

At Burno's request, Alferos next added references to the domestic violence charge because it suggested Tilkey had engaged in behavior that could be construed as acts of physical harm or violence toward another person, in violation of company policy. 

On April 16, 2015, Metzger e-mailed Harty stating she and Burns could support a decision to terminate Tilkey's employment or not. In a May 4, 2015 e-mail referencing the decision to terminate Tilkey's employment, Metzger wrote that they were amending the reason for terminating Tilkey to be "violence against another person whether employed by Allstate or not." Alferos submitted a formal termination request two days later stating that based on Tilkey's voluntary entrance into a diversion program, he had engaged in acts of physical harm or violence to another person. It identified the policy violation as "[t]hreats or acts of physical harm or violence to the property or assets of the Company, or to any person, regardless of whether he/she is employed by Allstate." The summary of investigation attached to the termination request stated, "the retention of the domestic violence charges suggests that Tilkey engaged in behavior that was construed as acts of physical harm or violence towards another person." 

Following written approval from Tilkey's supervisors, the company terminated Tilkey's employment on May 27, 2015. When the company terminated his employment, it informed Tilkey, "Your employment is being terminated as a result of engaging in behaviors that are in violation of Company Policy. Specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate."

The company then filed a Form U5 with FINRA reporting its reason for terminating him as follows: "Termination of employment by parent property and casualty insurance company after allegations of engaging in behaviors that are in violation of company policy, specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate. Not securities related."

SIDE BAR:  The Uniform Application for Securities Industry Registration or Transfer (the "Form U4") states in part that:

Criminal Disclosure

14A. (1) Have you ever:

(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign, or military court to any felony?

(b) been charged with any felony? 

. . .

14B. (1) Have you ever:

(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign or military court to a misdemeanor involving: investments or an investment-related business or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses? 

(b) been charged with a misdemeanor specified in 14B(1)(a)?

Since Tilkey had not been charged with, or convicted of, pled guilty/nolo contendere to any felony, he had no disclosure obligations under 14A(1). Similarly, the three charges against him did not involve any of the characterized circumstances set forth in 14B, and the sole charge to which he pled guilty also did not fall within the characterized misdemeanors. Accordingly, as Allstate noted, Tilkey had no reporting obligation under Form U4. 

As part of its defense at trial, Allstate presented evidence that Tilkey had used company equipment, including the company-issued laptop computer and the company's Intranet and Internet system, to forward e-mails containing graphic nudity and racist jokes, among other items. It argued that had it known of these e-mails at the time, it would have discharged Tilkey. Tilkey presented evidence that the circulation of the emails was part of the culture of the workplace.

(1) it did not violate section 432.7 and so there was no wrongful termination; (2) compelled self-published defamation per se is not a viable tort theory; (3) it did not defame Tilkey because there is not substantial evidence its statement was not substantially true; (4) punitive damages are unavailable in compelled self-publication defamation causes of action; (5) the defamatory statement was not made with malice; and (6) the punitive damages awarded here were unconstitutionally excessive.  

We agree that Allstate did not violate section 432.7 when it terminated Tilkey's employment based on his plea and his participation in an Arizona domestic nonviolence program and will reverse that judgment. However, we conclude compelled self-published defamation is a viable theory, and substantial evidence supports the verdict that the statement was not substantially true, so we will affirm that portion of the judgment. Additionally, while we conclude punitive damages are available in this instance, the punitive damages awarded here are not proportionate to the compensatory damages for defamation, and we will remand the matter for recalculation of the punitive damages. 

SIDE BAR: In pertinent part, Section 432.7 states:

(3) For purposes of this section:

(A) "Conviction" includes a plea, verdict, or finding of guilt, regardless of whether a sentence is imposed by the court.

(B) "Conviction" does not include, and shall not be construed to include, any adjudication by a juvenile court or any other court order or action taken with respect to a person who is under the process and jurisdiction of the juvenile court.

Because Tilkey appeared before the Arizona court and entered a guilty plea, which the court accepted, Tilkey's guilty plea was a conviction under section 432.7. This information was used by Allstate to terminate Tilkey's employment in May 2015, before the charges against Tilkey were dismissed on July 1, 2015. Thus, Allstate did not violate section 432.7 by using Tilkey's Arizona arrest as a factor in its decision to terminate his employment.

Allstate argues that because California views domestic nonviolence diversion programs as contrary to public policy, such a program is unauthorized, and thus the company's consideration of Tilkey's participation in one did not violate section 432.7. Tilkey contends that a domestic nonviolence diversion program is one that is expressly authorized and described by statute in Arizona, and thus Allstate was prohibited from considering Tilkey's participation.

abolished domestic violence diversion programs about a decade before Tilkey engaged in the domestic nonviolence program in Arizona. Were he to have been charged with the same crime in California, a diversion program would not have been an option. It would be contrary to California's public policy against misdemeanor domestic violence diversion programs to prohibit consideration of Tilkey's participation in one. The location of the crime in Arizona does not have any effect on California's public policy opposing diversion for domestic violence offenses. Accordingly, we conclude section 432.7's reference to diversion programs excludes out-of-state domestic violence programs, and Allstate's consideration of Tilkey's participation in one did not violate the law.  

Allstate next challenges the defamation verdict, contending that self-compelled defamation should not provide a basis for a defamation per se cause of action. It further contends there was no evidence here that Tilkey's self-publication was compelled by its publication of the reason for his employment termination on the Form U5 because that publication contained a privileged statement. Finally, Allstate maintains that its statement was substantially true, justifying reversal of the verdict. 

The "gist or sting" of Allstate's remarks was that Tilkey behaved in a physically violent or threatening manner, and that was why his employment was terminated. (See Campanelli, supra, 44 Cal.App.4th at p. 582.) But the facts do not point to Tilkey threatening Mann, physically harming her, or being violent. Thus, there is substantial evidence to support the jury's verdict that Allstate's statement to the contrary was not substantially true, and we will affirm. 

undermines at-will employment, which allows companies to discharge employees capriciously, as long as the decision is not unlawful. Allstate also argues that permitting this cause of action may have a chilling effect on communication between an employer and employee, reducing the free flow of information due to self-censorship. Next, Allstate argues this theory of defamation incentivizes an employee to spread defamatory statements instead of mitigating damages. Finally, Allstate notes that employment is primarily a contractual relationship. . . .

These same arguments could be offered to support the elimination of a defamation cause of action against employers altogether-the crux of Allstate's argument is that because the employee controls whether a statement is repeated to a third party, the risks of an end-run around the at-will employment doctrine is greater. But the additional requirements of proving a strong compulsion, the necessity to disclose the statement, and the foreseeability of the repetition all contribute to discouraging employees from simply repeating the defamatory information instead of mitigating their damages. . . .

I can't stress enough how powerful and dramatic this section of the CACtApp Opinion is and, lest it be lost in the shuffle, let me repeat it once again [Ed: emphasis supplied]:

However, the communication of Tilkey's termination here did not regard improper securities-related conduct, and Allstate did not limit its responses to fraud- and securities-related information. Instead, Allstate explained Tilkey's departure was the result of a "termination of employment by parent property and casualty insurance company after allegations of engaging in behavior that are in violation of company policy, specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate. Not securities related." This statement did not contain allegations of improper securities conduct, theft, or allegations or charges of fraud or dishonesty. It was not offered in anticipation of or to initiate an investigation; nor was it offered in the course of any other official  proceeding. 

CACtApp enunciates a critical limit upon the absolute immunity frequently granted to FINRA member firms when they submit Forms U5. Pointedly, the immunity may not extend beyond "improper securities-related conduct" and beyond "fraud- and securities-related information." As I have long argued, there is an area where U5 narratives become what I term "gratuitous," i.e., they stray from what is mandated/required within the regulatory construct. Moreover, the Court perceives that such gratuitous commentary may not fall under the ambit of the absolute immunity doctrine if it is determined that the cited language was "not offered in anticipation of or to initiate an investigation," and further pull back such protection from comments not "offered in the course of any other official proceeding." 

• Tilkey
• Allstate
• Domestic Violence
• Form U5
• FINRA
• Email
• Form U4
• Felony
• Misdemeanor
• Diversionary Program
• ACD
• Labor Code 432.7
• Punitive Damages
• CACtApp
• Wrongful Termination
• Self Compelled Defamation
• Defamation
• BrokeAndBroker
• Bill Singer