The Perils of Suing Your Critics

We often think of the nexus between legal and communications issues as dealing with media coverage that results when (1) you sue or (2) you get sued. But what if the coverage comes first? Should you sue your critics?

From the standpoint of legal perception issues, in most cases the answer is no.

Herb Greenberg makes this point in the context of financial and investment coverage in his "Weekend Investor" column last Saturday in The Wall Street Journal (here, although a subscription may be required). Two great opening paragraphs sum things up quite nicely:

You would think that by now public companies that monkey with their numbers would get the hint: Suing critics almost always backfires.

If nothing else, lawsuits or other attempts to discredit short-sellers, bearish analysts and others -- including financial journalists -- are often, in an oddly backhanded way, confirmation that the critics will be proved right.

Greenberg then goes on to describe how Biovail, a Canadian drug company, sued a number of its critics, including Gradient, an independent research firm, for racketeering. Specifically, Biovail alleged Gradient was working with short sellers to spread negative information about Biovail's alleged accounting fraud. Biovail generated alot of publicity as a result of the lawsuit, and that caught the eye of the SEC, which opened an investigation of Gradient. The investigation was quickly dropped, but in the process, the SEC learned enough about Gradient's concerns with Biovail to sue Biovail for accounting fraud. Biovail recently settled the charges without admitting wrongdoing, by paying $10 million to the SEC.

Poetic justice, perhaps, but a lesson to companies looking to sue their critics as well.

As more proof, consider the case of Sharper Image (a good summary is here), whose 2003 lawsuit against Consumers Union, nonprofit publishers of Consumer Reports, just brought more attention to the fact that their franchise product, the Ionic Breeze air cleaner, didn't work. Sharper Image's case against Consumer Reports failed, and the company wound up paying Consumer Unions attorney's fees. Sharper Image declared bankruptcy in February, 2008.

All of this backs up a key refrain in my legal/public relations work: just because you can sue doesn't mean you should. A quick check of the recording industry's problems bear that out. Sure, there are myriad reasons why traditional recording labels are hurting, but they certainly didn't endear themselves to their fans by suing over the downloading of music -- even if they were in the right legally (see my 2003 USA Today piece on the RIAA's legal actions, here).

There are legitimate reasons to sue your critics, particularly over defamatory content. But before you do, think hard about: (1) the viability of your claim; and (2) the additional scrutiny the lawsuit will bring to your company and its own actions.