Nevada Trial Judge Limits Default Judgment Against Host of Critical Comments – Was the Relief Awarded Still Too Much?

by Paul Alan Levy

In an intriguing ruling last week granting relief by consequence of a default judgment, a federal judge in Nevada engaged in a fair amount of sua sponte analysis in paring down the relief sought against the operator of a web site that hosts reviews of colleges and universities.  The opinion included an excellent discussion of the reasons to be wary of granting injunctive relief against criticism contained on consumer review web sites.  The court appears, however, to have missed one significant issue: the impact of Section 230 on the available relief.

Plaintiff's Allegations and the Damages Award

The complaint alleges that the web site hosts a forum that displays a number of highly defamatory criticisms of a proprietary Utah trade school called Neumont University; that the site’s operator, a Nevada company called Little Bizzy, encouraged the posting of criticism and used search engine optimization techniques to help call consumers’ attention to the posts about Neumont; that the operator deliberately removed positive reviews, thus making it appear that student reaction to Neumont was uniformly negative and hence presenting a false picture of its actual reputation; that defendants hinted that the site could be purchased for a high price; and that, as the dispute between the parties escalated, the site disabled the comment function and thus blocked future positive reviews.  The complaint further alleged that, during the course of the prelitigation dispute between the parties, the site operators placed the word “warning” on the web page about Neumont and linked from that word to a page that explained the word as signifying that Neumont used a cult-like atmosphere to quell criticism, hired largely incompetent faculty, and was on the verge of bankruptcy.  The complaint alleged claims for business disparagement and interference with contractual relations and economic advantage (which pursuant to Hustler Magazine v. Falwell and its progeny legally depend on showing defamation).

Little Bizzy tried to defend against the litigation through its non-lawyer principal, but the trial court warned it that an entity can only appear through counsel.  Little Bizzy received extensions while it sought counsel, but it ultimately advised the court that it could not find counsel it could afford.  Because Little Bizzy was unrepresented by counsel, default judgment was entered against it.

Having obtained this default, Neumont sought injunctive relief, damages far in excess of the jurisdictional amount that had been pleaded in the complaint, and attorney fees; by this time the case had been assigned to a newly appointed district judge, Jennifer Dorsey, who held a hearing at which plaintiff offered evidence in support of its claimed relief.  Judge Dorsey’s opinion awarding damages reflects that she received evidence that a number of prospective students had chosen not to enroll at Neumont, where they would have paid tuition, based both on the postings on the CollegeTimes web site and one certain defamatory tweets by Little Bizzy; Neumont claimed the tuition and housing revenues lost from the non-enrollment of twelve students as a result of “defendants’ behavior” as the measure of its damages, and Judge Dorsey agreed, awarding the full amount claimed as compensatory damages — $1,020,000 (there was no evidence about Neumont's costs per student, and Judge Dorsey did not deduct them to fix the amount of compensatory damages).  Judge Dorsey declined to award any attorney fees, ruling that none of the torts alleged provided for fees as a form of relief, and also refused to grant default judgment against Little Bizzy’s principal because he had not been properly served, and even though it was he who had signed the papers submitted on Little Bizzy’s behalf.

Denial of Injunctive Relief

From my perspective, the nicest part of Judge Dorsey’s opinion was at the end, where she flatly denied Neumont’s request for injunctive relief, citing both the rule that equity will not enjoin a libel and the constitutional rule barring injunctions against speech as impermissible prior restraints.  The judge added that even if some injunctive relief against future defamation were ever constitutionally permissible, the broad injunction that Neumont was seeking, against any future “false and/or disparaging statements and content,” would be impermissible.  And her discussion of the propriety of injunctive relief concluded with this paean to the public policies that encourage untrammeled consumer review sites:

     "Consumer reporting plays a vital role in ensuring that a company’s desire to maximize profit, if abused, will not go unnoticed; and online fora for the exchange of those ideas play an increasingly large role in informing consumers about the choices that make sense for them. Although Neumont, like any legitimate business, would like to operate in a marketplace where one-sided, disparaging, and even false statements do not hamper its desire to maximize its own profits, Neumont is not entitled to conduct its affairs in an environment devoid of criticism—even false and disparaging criticism. Because these communications implicate fiercely protected First Amendment rights, the appropriate remedy for Neumont is not a gag order or forced warning label on the Collegetimes website but an after-the-fact lawsuit for damages caused by any demonstratively tortious actions. Accordingly, Neumont’s request for a permanent injunction is denied."

What, Then, of Section 230?

    Considering the sensitivity that Judge Dorsey displayed to the free speech interests that would have been offended by injunctive relief, and her scrupulous winnowing down of Neumont's claims by eliminating attorney fees, it is disappointing that she wholly ignored the impact of section 230 on her large damages award.  This blog has often discussed the way in which section 230 prevents companies from obtaining the removal of critical comments by a heckler’s veto that makes it too expensive for web operators to tolerate criticism of companies that have the money to hire lawyers to allege falsity for them.  And the complaint clearly pleaded the facts establishing a section 230 defense for much of what Little Bizzy did – it operated an interactive web site, defamatory reviews were posted on that site by unknown persons, and defendants’ editorial policies harmed plaintiff’s reputation by removing all of the positive comments while allowing the negative ones to remain (although the complaint alleges that all positive reviews were removed, when I visited the forum this week, there were a few positive reviews still there).  The complaint even recites the rather puerile terms in which the site's about page seeks to discourage litigation over the contents of the reviews. 

We know from the Ninth Circuit’s rehearing decision in Barnes v. Yahoo that a section 230 defense can be raised on a motion to dismiss if plaintiff pleads facts creating the affirmative defense — iin those circumstances, the plaintiff has pleaded itself out of court.  Hence, damages barred by that defense should have been excluded from the award, even in a default proceeding.

    To be sure, some of the complaint‘s allegations charged conduct outside section 230 – namely, that it was the defendants that created the defamatory warnings link and content (having looked at the warnings page, I question whether in combination with the link from the Neumont forum page it defames Neumont — the warnings page says that institutions merit warnings because they have at least one of several flaws, without saying which institution has which flaw).  The opinion also reflects that plaintiff presented evidence that, after the complaint was filed, the defendants issued defamatory tweets and that these tweets affected student enrollment.  But the defamatory tweets were not alleged in the complaint (nor were some allegedly defamatory press releases cited in the supporting affidavits), and given the significant free speech interests implicated by such a large damages award, it is questionable whether the trial judge should have awarded damages based on defamatory conduct not alleged in the complaint and not, therefore, presumed because of the default to have occurred.  And not only did the evidence supporting the damages award, as cited in the opinion, apparently include the loss of tuition from students whose non-enrollment was “as a result of the Collegetimes website,” but equally important the judge gave no sign of having considered the impact of section 230, or of having apportioned the claimed damages that were proved by the live testimony to ensure that supposedly lost revenues that resulted from defamatory facts asserted in forum posts, as opposed to facts asserted in the warning page or in the tweets, were excluded from the award.  The docket does not afford access to the transcript of the evidentiary hearing, but I did examine the affidavits of the only witness shown by the docket as having testified on damages at the hearing, and those affidavits did not separate out from the damages claimed lost tuition and housing fees resulting solely from students viewing the negative forum posts on the web site.

    This led me to wonder how Judge Dorsey, having been so attentive to the free speech consequences of the requested injunction, could have missed the section 230 issue.  Although her opinion does not mention section 230, an earlier ruling denying a preliminary injunction, issued by the judge to whom the case was previously assigned, noted in passing that Little Bizzy had moved to dismiss the complaint based on section 230 but that the motion was “stricken” because it was not signed by an attorney.  The motion has literally been stricken from the record.  When I tried to access the document on PACER, I received a screen saying that I did not have permission to view the document; and when I called both Judge Dorsey’s chambers and the clerk’s office to inquire further, I was told that the office could not show me the document once it was ordered stricken.  I was, therefore, unable to assess what section 230 arguments Little Bizzy had tried to present, albeit without counsel, and thus assess how Judge Dorsey could have missed the obvious section 230 defects in her default judgment.  

    It does seem to me that the motion to dismiss, although the court did not consider it, is a judicial record to which the public should have access; thus my next step in trying to understand what happened in this case will be to try to persuade the district court to release the document.

It was Eric Goldman who called my attention to the case; his take is here.  I disagree with one of his points — he expresses dismay at Judge Dorsey's implication that, having denied an injunction because damages are an adequate remedy at law for libel, Neumont could proceed against Little Bizzy later for the continuing impact of libel that remains posted.  But assuming that the single publication rule does not interfere, that is, in fact, the risk that defamers run if they ignore adverse rulings about their speech being defamatory and continue to publish them.  I do think he is right to wonder whether Neumont should have had to establish by more than a statistical assumption based on the fraction of accepted students who enroll that it was the viewing of defamatory matter not protected by section 230  that caused particular students not to add to Neumont's profits.

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