The Volokh Conspiracy
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Constantakis v. Bryan Advisory Services, LLC, decided today by the Pennsylvania Superior Court (Judges John Bender, Alice Beck Dubow, and James Gardner Colins), involved a dispute between financial advisors (who had a financial company called VAM) and a parent financial company (BAS) with which they had been affiliated:
[The plaintiffs] learned that Mr. Bryan [of BAS] filed [Uniform Termination Notices for Securities Industry Registration ("Form U5")] accusing [them] of unspecified SEC violations. The Form U5s contain allegations that [plaintiffs] actually sent out the protype [sic] invoices with intent to defraud clients. Mr. Bryan also filed an Investment Adviser Public Disclosure ("IAPD") concerning [one of the plaintiffs]. The IAPD explains that a termination is disclosed when the IAR was discharged after allegations were made that accused the IAR "of violating investment-related statutes, regulations, rules or industry standards of conduct; fraud or the wrongful taking of property…." The IAPD … contains essentially the same allegations as the Form U5s. Like the Form U5, the IAPD is publicly available.
BAS and Mr. Bryan blocked VAM's ability to access any of its client accounts and left VAM [the plaintiffs' company] without a platform on which to operate, effectively halting the ability of [plaintiffs] to provide direct financial services and fulfill fiduciary obligations to clients. Additionally, BAS and Mr. Bryan wrote letters to VAM's clients informing them that it had terminated the employment of [plaintiffs]….
Plaintiffs sued and got a preliminary injunction; in the trial court's words:
During the hearing, despite having several months to investigate the allegations contained in the Form U5s and the IAPD, this court found that [defendants] failed to present any evidence that [plaintiffs] violated any investment-related statutes, regulations, rules, and/or industry standards of conduct. Additionally, this court found that, even if the VAM prototype invoices were sent out to BAS clients prior to the filing of the Form U5s and IAPD report, [defendants] failed to demonstrate that [plaintiffs] had anything to do with the alleged event….
The [court granted] injunctions enjoin[ing] [defendants] from making false, unsubstantiated, and defamatory statements about [plaintiffs]. This court further ordered that the defamatory language in the Form U5s and IAPD be expunged, and required [defendants] to file neutral, amended Form U5s … as well as a neutral, amended IAPD ….
In Willing v. Mazzacone (1978), the Pennsylvania Supreme Court had seemed to categorically bar anti-libel injunctions (applying Article 1, Section 7 of the Pennsylvania Constitution), but the appellate court read that decision more narrowly:
[1.] To the extent that the orders enjoin [defendants] "from making false, unsubstantiated, and defamatory statements" about [plaintiffs], we conclude that this language clearly restricts [defendants]' future speech and, thus, comprises an unconstitutional prior restraint. Accordingly, we direct the trial court to strike said language from the Injunction Orders.
[2.] As to the remaining portion of the Injunction Orders, which pertains to the expungement of defamatory language and the amendment of the previously filed Form U5s and IAPD, [defendants] have failed to convince us that such injunctive relief constitutes a "prior restraint" as prohibited by … Willing …. A "prior restraint" involves an order forbidding future communications. In fact, the term "prior restraint" in and of itself implies a restraint imposed on communications prior to or before the communications occur. As noted by the trial court, in Willing, the injunction orders were found to violate Pennsylvania's prohibition on prior restraints "because the orders precluded Ms. Willing from speaking her opinion freely in the future." Moreover, the cases cited by [defendants] in support of their argument similarly involve the overturning of orders that restricted an individual's right to freely communicate their thoughts and feelings in the future….
Here, the trial court ordered [defendants] to expunge the defamatory language in the January 13, 2021 Form U5s and IAPD and to file neutral, amended forms, only after conducting a two-day evidentiary hearing, at which the trial court found [defendants] failed to produce any evidence in support of the allegations contained in those forms. The Injunction Orders were entered on April 21, 2021, months after the disputed communications had taken place, and only after the trial court made a factual finding that [defendants] filed the Form U5s and IAPD "with reckless, and potentially malicious, allegations that … had no basis in fact whatsoever." TCO at 10. Thus, we agree with the trial court that the second portion of its Injunction Orders does no more than require [defendants] to amend and update forms which precipitated the underlying action. Hence, [defendants] are due no relief on their prior restraint claim as it pertains to the remaining portion of the Injunction Orders.
Next, [defendants] argue that a defamation action requires a trial before a jury of one's peers and that the two partial days of hearings held by the trial court in this matter "simply do not satisfy the constitutional requirements of a jury trial. Therefore, the [trial court's] orders plainly violate both the Pennsylvania and the federal constitutions" … (citing Pa. Const. Art. I § 7 ("[A]nd in all indictments for libels the jury shall have the right to determine the law and the facts, under the direction of the court, as in other cases[.]")).
We recognize that the right to a jury trial, as preserved by Article I, Section 6, extends to all causes of action that existed at the time the Pennsylvania Constitution was adopted. The Pennsylvania Constitution does not prescribe, however, at what stage of an action a trial by jury, if demanded, must be had. The only purpose of Article I, Section 6 "is to secure the right of trial by jury before rights of person or property are finally determined."
Given that no final determination has yet been made on the underlying causes of action in this matter, we reject [defendants]' argument that the Injunction Orders have deprived them of their right to a jury trial. In reaching this conclusion, we emphasize that "[t]he purposes of a preliminary injunction are to preserve the status quo and prevent imminent and irreparable harm which might occur before the merits of the case can be heard and determined." We agree with the trial court that it was necessary to grant injunctive relief before final disposition in this case, in order to preserve [plaintiffs]' ability to work in their chosen field….
The trial court rejected [defendants]' argument that its orders requiring amendment of the Form U5s and the IAPD constitute impermissible compelled speech …. ["]Just as [defendants] contend they were required to file the Form U5s and the IAPD, [defendants] are also required to amend and update the filings before final disposition.["]
"Unlike in Willing, the Form U5s and the IAPD do not merely exhibit [defendants]' opinion regarding [plaintiffs'] professional integrity. In this case, [defendants]' filing of the unsubstantiated Form U5s and the IAPD also impact [plaintiffs'] very livelihoods and their ability to work in the investment industry in any capacity.
"At the hearing, it became clear to this court that, if the record is not corrected, [plaintiffs] will be harmed in the following unique and significant ways: (1) they cannot get on a trading platform and manage the money of their clients; (2) they cannot work in the industry for other registered investment advisory firms; and (3) they are at risk of losing the clients that they have not already lost…. [defendants]' actions in this case effectively black-ball [plaintiffs] from working in the financial services industry in any manner." …
Instantly, the trial court made significant factual findings following an evidentiary hearing on [plaintiffs]' requests for special preliminary injunctive relief. The court determined that [defendants] failed to produce any evidence in support of their allegations that [plaintiffs] violated any investment-related statutes, regulations, rules, or industry standards of conduct, and concluded that [defendants]' filing of the Form U5s and the IAPD was done with reckless, and potentially malicious, intent. We believe such findings constitute "facts or circumstances" which [defendants] certainly should be aware cause the forms they originally filed to be "inaccurate or incomplete."
However, we also agree with [defendants] that, to the extent the amended language proposed by the trial court indicates "the firm" did not find any wrongdoing on the part of [plaintiffs], such language should not be compelled at this juncture. The Form U5s and IAPD should be amended, rather, to report the trial court's preliminary findings regarding [plaintiffs] in the pending litigation. We believe such amendments will comply with FINRA's regulations, providing the public with accurate information, while also meeting the trial court's objective of preventing [defendants] from essentially holding [plaintiffs]' careers hostage while this case proceeds to a final determination on the merits. Thus, we remand for the trial court to make the appropriate changes to Schedule A….
For more on how courts throughout the country treat anti-libel injunctions, see my Anti-Libel Injunctions article.