The speech trap

Thursday, September 22, 2005

The speech trap

Careful: What you say in a company presentation can be held against you in a court of law.

By Dave Zielinski


Opening your mouth on behalf of your company is becoming an increasingly risky business. That's because various court decisions over the past few years have made it easier than ever for companies and their spokespeople to be held legally liable for information shared with co-workers, customers, investors or other audiences, in speech or in writing.

You probably don't know it yet, but the courts have already put new restrictions on companies' First Amendment rights of free speech, and new securities laws have made it harder for corporate presenters to satisfy audiences' growing appetite for financial information without running afoul of the law. These new laws, which are intended to foster more truthful corporate communication, in some instances are having precisely the opposite effect by subjecting all forms of corporate information-sharing, including presentations, to closer legal scrutiny. Also problematic is the fact that groups burnt by recent corporate scandals are demanding more transparency and honesty in business communication, but delivering that level of detail is now fraught with more legal pitfalls and complexities than ever.

What's a poor, free-speech-loving presenter to do?


The First Amendment and corporate speech

Most presenters don't give much thought to their free-speech protections when pitching a product, discussing company strategy or doling out advice at industry conferences – but they should. The most ominous legal precedent that has the potential to cloud a presenter's day is a 2003 court case called Nike v. Kasky. A consortium of labor unions charged that Nike, the Beaverton, Ore.-based athletic apparel and equipment manufacturer, was engaged in unfair labor practices in its overseas factories. In response, Nike conducted what it said was an independent study of those practices and released the results (which in essence reported the company was doing a good job but could do better) in a series of press releases, op-ed letters and presentations to the news media and university presidents. Mark Kasky, a consumer activist in California, filed a lawsuit against Nike alleging its information campaign amounted to "false and deceptive" advertising under a state statute. The California Supreme Court ruled in favor of Kasky, arguing that since Nike's public statements about its operations might persuade consumers to buy its products, that communication should be treated as commercial advertising, and thus was not privy to the same First Amendment protections as most ordinary speech.

Because Nike's factual statements were directed by a "commercial speaker" to a commercial audience (many of the company's clients and prospects are university administrators and athletic directors), its presentations became subject to state laws barring false and misleading commercial messages. The U.S. Supreme Court refused to hear the case, and Nike eventually settled, paying $1.5 million to the Fair Labor Association to fund worker-development programs, so the core legal questions raised by the case were never resolved.

Fallout for presenters


It's been two years since the Nike decision (or lack thereof), and little if any clarity has been brought to the debate. Consequently, the decision and its aftermath continue to have significant and ongoing implications for corporate presenters. While executives, salespeople, spokespeople, investor-relations managers and others have long been bound by state laws (as well as ethical codes) to be truthful and accurate in their communication, the Nike ruling magnifies the legal hazards for speaking freely about products, services or company performance, particularly as that speech relates to public policy issues such as employment practices, consumer privacy rights, taxes and other matters. That ruling, along with a number of high-profile cases of corporate malfeasance (Enron, Worldcom, Tyco, Adelphia, etc.) have significantly altered the legal context in which corporate speech takes place. By making it possible to interpret any kind of corporate communication – be it a presentation, press release, phone call or webconference – as a form of advertising, the courts may have inadvertently sewn the seeds of confusion and paranoia with regard to what is and isn't legally protected corporate speech.

Because more of what they say to external audiences could be interpreted by the courts as run-of-the-mill commercial advertising – akin to a print or TV ad, with less First Amendment protection – today's business presenters need to vet their content even more carefully, says Connie Bagley, an associate professor of business administration at the Harvard Business School in Boston.

"What the California court did well is distinguish between parts of the Nike statements where Nike was talking about public policy issues and the company's statements of fact about its own labor practices," Bagley says. "The upshot is whenever corporate speakers are making statements of fact about their business, they need to be doubly sure they have a strong basis for what they are saying and be comfortable it is true."

Even when expressing an opinion – claiming your product is the best, fastest or most reliable on the market – U.S. securities laws state you still need a "reasonable basis" for making that claim, Bagley says.

Sins of omission

But are these real threats to everyday presenters, or are the dangers limited to certain commercial speaking scenarios in California? Though the law hasn't been tested yet in other states, some experts believe the hazards have grown for those who make sales-and-marketing-related presentations in particular. The case of Merck & Co.'s controversial drug Vioxx serves as a cautionary tale, says George Brenkert, a professor and director of the Georgetown Business Ethics Institute in Washington, D.C.

Merck has been criticized for allegedly knowing about the dangerous side effects of Vioxx, which include heart attack and stroke, yet not allowing its salespeople to refer to these risks in presentations to customers. "There's a proverb that says a half-truth is a whole lie," Brenkert says. "These days, it's incumbent upon people who are doing sales presentations to make sure they have the whole story. If there are things other people in their business know, but the sales staff isn't permitted to communicate to customers, that means trouble for both [the presenter] and their company."

Securities laws make it clear that statements can be deemed misleading not just for what presenters say, but what they fail to say, Harvard's Bagley adds. "If you omit facts that cause what you say to create a misleading impression of a situation, that can be actionable securities fraud," she says. "Especially if that information is deemed material, and what has been left out is likely to influence an investor's decision to buy, sell or hold a stock."

It's a fact presenters would be wise to remember when tailoring information for different audiences around the world. An executive might say one thing to an audience in the United States and another to a group in China, with the belief that what's relevant for one audience isn't always relevant for another. But those presenters need to make sure no "material" information is left out as they customize that content.

"If potential investors in Shanghai were not told what those in San Francisco had just heard, and it was to make them rethink what they know about a strategy, product or service, then that presenter and his company would have a problem," says Brenkert. "It amazes me that some organizations continue to believe that if they engage in deception in one part of the world it won't become known in another part. In this age of instantaneous communication, people are always going to find out."

Bagley says the Merck case and others make it essential for salespeople to know who within their organization can verify the truth of sales pitches they're making to customers. A presenter's assertion that they'd only "been telling the truth as they knew it" won't be defensible in a U.S. court of law should it turn out others in the organization kept them in the dark. "The sales rep may not get arrested for fraud, but the company will very much be on the hook," Bagley says. One particularly vulnerable area is product-safety data. Such information should be housed in a centralized, secure place such as a company intranet so salespeople can easily access it and have confidence it's accurate and current, she says.

They made me do it

It's not only companies that can take the fall if their messages are deemed deceitful or "partial truths" by attorneys general, SEC regulators or others. Individual employees who make such statements can be sued under Unfair and Deceptive Acts and Practices (UDAP) laws, says Stephen Gardner, director of litigation for the Center for Science in the Public Interest in Washington D.C.. UDAP laws, which most states have to protect against fraudulent business practices, don't have to prove intent to deceive, Gardner says, only the existence of a false, misleading or deceptive statement.

"The presenter making the statement can't just point to the company and say, 'they made me do it,' he says. "When you speak publicly for the company, you are responsible for what comes out of your mouth, whether you are the CEO, a middle manager or the janitor." Those who help craft an organization's messages, be they speechwriters, corporate communication or public relations staff, need to be versed in the legal and regulatory ground rules – and land mines – of this new territory as well.

"Because of corporate leaders who've recently blamed those under and around them for their company's downfall, those who prepare statements for executives better be worried," says Gardner. "Their job isn't to just serve as a typewriter, it's to assemble facts and help create a point of view. If they don't bother to find out that what they are writing is true, or if they know darn well it isn't, they can be held liable."

A chilling effect?

Though no individual has been prosecuted in the two years since Nike vs. Kasky, some believe the Nike decision is nevertheless having a chilling affect on organizations' willingness to communicate as freely with external audiences as they did before. Companies may now be more reluctant to say anything or issue press releases for fear of a lawsuit, the argument goes, and shutting off that information spigot has the potential to hurt such stakeholders as investors, customers and even the news media, who need the information to make decisions or do their jobs. Coupled with increased pressure for more disclosure on company finances and operating strategies in the wake of corporate scandals, some feel the current legal climate is inadvertently choking off much healthy and necessary communication between companies and the public.

Richard Samp, chief counsel of the Washington Legal Foundation, a public-interest law and policy center in Washington, D.C, believes the longer the Nike decision is allowed to stand, the more organizations are apt to shy away from saying anything substantive in public. This mood, he says, will only create more "feel-good advertising that contributes little to the public debate."

Indeed, there is already evidence that the ruling has made some companies more reluctant to release corporate social responsibility reports (CSRs), which outline their efforts in areas such as labor compliance, community affairs, sustainable development and workplace programs. Nike itself didn't release a CSR report following the court decision, saying it wanted to avoid the potential of further liability. The company has also declined media interviews and numerous invitations to speak at business forums because of the decision.

Brenkert has experienced fallout from the ruling firsthand. As he was preparing to publish a book on corporate accountability and integrity, the Georgetown professor says, one company withdrew its case study following the Nike decision. "The information they had provided wasn't terribly risky, but their lawyers got nervous about it," Brenkert says.

Securities law minefields

Understanding where free-speech protections end and commercial-speech restrictions begin isn't the only new challenge for today's presenters. For the past few years, companies also have been grappling with new securities laws that regulate how they can communicate financial information to audiences.

The Regulation Fair Disclosure (FD) is a rule enacted by the U.S. Securities and Exchange Commission (SEC) in October 2000 to level the investment playing field by eliminating the problem of selective disclosure, or when groups such as Wall Street analysts or large institutional investors receive access to key investment information before others do. Now, when the leaders of public companies communicate "material, non-public" information to groups such as portfolio managers, they must also simultaneously disclose the information to the public at large.

Regulation FD presents a dual challenge to presenters who are top executives, investor-relations reps or corporate spokespeople. First, they must know with crystalline clarity what information they can safely disclose to whom. And separating what is material from what is nonmaterial in information isn't always easy without a solid, bright-line test from the SEC. The goal is to avoid slip-ups during unscripted presentations or conference calls with analysts, reporters and others. For example, an executive might mention a big new sales contract to mutual fund managers that he hasn't yet announced publicly, or touch briefly on his company's improving financial performance during a speech at an invitation-only business forum. Both are violations, since that information first needs to be publicly announced in a press release or other SEC-sanctioned communication method.

The threat is real


Presenters need to be equally cautious in their disclosures to internal audiences. For example, a CEO or CFO of a public company can't even hint during an all-company meeting about the company's current financial status without first putting it in a press release and distributing it via the proper channels.

Second, companies need well-coordinated strategies – and adequate presenter training – for simultaneously communicating material information to different channels and audiences. Many companies now rely on Webcasting for analyst meetings or investor conferences, partly because beaming these presentations out to anyone with Internet access satisfies the SEC requirement for avoiding exclusivity in conveying financial information.

The threat of being nabbed for a Regulation FD violation is real. In the past three years, the SEC has taken enforcement actions against a number of companies for violations. In one prominent case, the SEC accused the chief financial officer of San Mateo, Calif.-based Siebel Systems of inappropriately disclosing material information during two private events he attended, including an invitation-only dinner. Siebel is the first company accused of violating Regulation FD for a second time, according to The Wall Street Journal, and the first to fight the charges.

In any case, many presenters are finding themselves torn between the pressure for greater specificity and truthfulness in corporate communication and the knowledge that advocacy watchdogs – or SEC regulators – may be looking over their shoulder, waiting for slips-ups or regulatory breaches to pounce on. Only by understanding the motives and agendas of these disparate audiences can presenters successfully walk this new and potentially perilous high-wire of corporate speech. Those who ignore the dangers altogether do so at their own peril, and may one day find themselves in for a sudden, painful fall.


Dave Zielinski is a frequent contributor to Presentations magazine.

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