Before I bought my car a few years ago, I did what a lot of people do — I checked the review in Consumer Reports. The magazine gave the thumbs-up.
I am happy with my purchase. But suppose I wasn’t? Suppose my Infiniti had some manufacturing or design defect that emerged after I bought it, a defect so serious that it made the car unsafe or reduced its resale value. Could I successfully sue Consumer Reports?
No, I couldn’t. The magazine did not design the car, or build it, or sell it to me. I did not hire the magazine to conduct engineering studies or performance tests for which it owed me a duty of care. The magazine offered me an opinion. I chose to give some weight to that opinion. That is my responsibility.
If opinions were grounds for lawsuits just because they turned out (in someone else’s opinion, at least) to be incorrect or even hopelessly misguided, I would have sued every movie critic who advised my wife to take me to see “The Hours.”
Many countries, including some that are genuinely democratic, regulate expressions of opinion. Pro-Nazi sentiments are banned in Germany, for example. But our respect for free expression is a cornerstone of our society, enshrined in the First Amendment and applicable in every facet of American life, including commerce. A manufacturer can call its molasses-like two-cylinder econobox “surprisingly fast” and get away with it, because the statement merely expresses the opinion that you might be surprised that it moves at all. That manufacturer can get into trouble if it falsely claims, by contrast, that its four-wheeled paperweight is “faster than a Mercedes S-class,” since this would simply be a lie rather than an opinion. There is a difference.
It is therefore no surprise that every court that has considered the role of ratings agencies in the bond-market meltdown several years ago concluded that the agencies cannot be held liable for giving a AAA thumbs-up to securities that imploded soon after they rolled off the assembly line.
The latest and most significant such ruling came this week from the Second U.S. Circuit Court of Appeals in New York, in a case brought by several pension funds against the Moody’s, Fitch and Standard & Poor’s rating agencies. A three-judge panel held that the agencies offered “mere opinions” about the creditworthiness of the bonds.
The plaintiffs tried to argue that because the agencies were involved in structuring the securities, they were “underwriters” who could be held liable for the product’s defects, like a manufacturer or a seller. But the appellate judges, affirming the lower court, said the ratings agencies are not underwriters. They are, in effect, more like critics. Inviting a critic into the editing room while a film is being produced would not make the critic’s subsequent positive review actionable.
The court came to the correct answer, but the story is not over. Other cases stemming from the credit crisis are still percolating in the courts. Moreover, the Dodd-Frank financial reform legislation Congress enacted last year, following the crisis, gives investors a right to sue ratings firms for failures deemed “intentional” or “reckless.”
How does this square with the courts’ holdings that creditworthiness ratings are mere expressions of opinions? Can Congress give someone the power to sue someone else over a “reckless” opinion? If so, is the day far off before you can sue me for some of the commentary that appears in this space?
You might think that would be a good idea, but I don’t think the courts are going to let it happen. The law can punish statements that purport to be fact but which are, in fact, deliberate lies. Maybe this principle can stretch to create liability for a ratings firm that actually believes a security is very risky but which deliberately misleads the public about what its opinion really is. However, the idea that an opinion can be punishable because it is “reckless” sets up a requirement that a view must have merit (in someone else’s view) before it can be expressed.
This crosses a line that the courts, rightly, have refused to cross. When push comes to shove, I believe Dodd-Frank’s overreaching will be rejected, in the interest of keeping our marketplace of ideas as free as possible. That’s the right answer — but I can’t prove it, nor do I have to. It’s just my opinion.