Barry M. Klayman and Mark E. Felger

In CapStack Nashville 3 v. MACC Venture Partners, C.A. No. 2018-0552-SG, (Del. Ch. Aug. 16, 2018), Vice Chancellor Sam Glasscock III considered whether equity had jurisdiction to entertain a temporary restraining order (TRO) that would have the effect of a prior restraint on speech. In a letter opinion, he concluded that the Delaware Court of Chancery cannot place prior restraints on speech, especially before a determination whether the speech is entitled to constitutional protection following a hearing on the merits.

The case involved a joint venture to invest in and manage three apartment complexes in Nashville, Tennessee. The plaintiffs purchased the apartment complexes in August 2017. Before making the investment, the plaintiffs were introduced to the defendants, who claimed to have experience managing apartment complexes. Based on those representations, the plaintiffs offered the defendants the opportunity to participate in a joint venture to manage the properties.

The plaintiffs soon came to believe that the defendants' representations about their experience and capabilities were false. They thought the defendants had mismanaged the properties and breached provisions of the operating agreement requiring the plaintiffs' consent for certain actions.

The plaintiffs complained to the defendants about their conduct. In return, the defendants accused one of plaintiff's principals of misconduct, including misrepresenting his experience and qualifications in a private placement memorandum (PPM) related to the joint venture. They also alleged that he misrepresented the fees he had received from the venture in the PPM, and used a different version of the PPM to defraud investors and others. The defendants threatened to disclose these allegations to investors and the SEC unless the plaintiffs withdrew from the joint venture.

The plaintiffs then commenced this action, asserting multiple claims against the defendants, including fraud, breach of contract, breach of fiduciary duty, tortious interference with contract and defamation and trade libel. At the same time, plaintiffs sought a temporary restraining order to enjoin the defendants from making defamatory and libelous statements about the plaintiffs to the SEC, investors and others. The TRO would have had the effect of a prior restraint on the defendants' speech.

Glasscock denied the TRO. First, he found that plaintiffs had failed to establish that irreparable harm would likely result absent a TRO. Significantly, the parties' filings in the case were a matter of public record, since none of the papers had been filed under seal. The plaintiffs attached the letters containing the allegedly defamatory material to the complaint, so that the information that the defendants threatened to give to the SEC and investors was already accessible to the public. It was unlikely that further dissemination of the information would work irreparable harm on the plaintiffs. Moreover, the defendants told the court that they had already disclosed the allegedly defamatory information to the Financial Industry Regulatory Authority (FINRA), and the SEC had initiated an investigation into the allegations.

Second, Glasscock found that the plaintiffs' request for a TRO ran afoul of the equitable maxim that “equity will not enjoin a libel.” This rule traces back to equity's traditional refusal to exercise jurisdiction over a claim of defamation based on a prayer for injunctive relief, but now also rests on the importance afforded to constitutional protections of speech. Glasscock distinguished cases that permanently enjoined a defendant from repeating speech found defamatory in an adversarial proceeding, where a judge or jury has made a final determination that the speech was defamatory. He observed that no Delaware case had decided whether a court may enjoin future defamatory speech following an adjudication of falsity, but that was not the case before him. Instead, the plaintiffs were asking him to temporarily enjoin future speech based solely on a finding that the complaint pleaded a colorable claim for defamation or trade libel. To enjoin speech upon such a showing would amount to an unconstitutional prior restraint.

Glasscock noted that preliminary injunctions are often easier to get than final determinations on the merits, and they are granted on less evidence with less deliberation. Therefore, the risk that the court will err and mistakenly restrict protected speech is greater. This runs afoul of first amendment protections, as well as protections of speech and press in the Delaware Constitution. Glasscock suggested that the Delaware Constitution, which provides in article I, Section 5, that “any citizen may print on any subject, being responsible for the abuse of that liberty,” explicitly prohibits prior restraints.

The plaintiffs sought to avoid the rule against prior restraints by characterizing their claim as one for trade libel, and arguing that the complaint also stated a claim for tortious interference with business relations. In such circumstances, a TRO would be appropriate. Glasscock rejected this argument. As traditionally understood, trade libel addresses false statements about a competitor's products. However, the plaintiffs' trade libel claim was not of the traditional variety, since it did not involve disparagement of goods. By characterizing their defamation claim as one for trade libel, relying on the expanded scope of modern trade libel law, the plaintiffs were seeking to circumvent the rule against prior restraints on speech. Assuming Delaware law permits the issuance of a TRO to prevent a traditional trade libel accompanied by an independent tort supporting equitable relief, it would not allow the use of the expanded scope of modern trade libel law to overcome the rule against pretrial speech restraints.

Third, Glasscock noted that the Defendants were at least conditionally privileged to report their allegations to the SEC. The possibility that the statements the Defendants threatened to make to the SEC were privileged also weighed against entry of a TRO.

Glasscock wrote that preventing harm is a public good, but it is not the only public good. In certain cases, other values may trump maintenance of the status quo. In the Anglo-American judicial system, freedom of speech is “a jealously guarded right,” the protection of which will stay the hand of equity.

Barry M. Klayman is a member in the commercial litigation group and the bankruptcy, insolvency and restructuring practice group at Cozen O'Connor. He regularly appears in Chancery Court.

Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring practice group at the firm.