HR Management & Compliance

Avoiding Defamation Suits: Use Caution When Discussing Ex-Employee Turned Competitor-A 4-Point Checklist


Have you ever fired an employee and then worried that he would join a competitor and “bad mouth” your organization to important customers or vendors? One employer in that situation went a little too far in trying to control the damage to its reputation-and found itself ordered to pay the former employee $1 million for defamation. Fortunately, a second dispute-with the employer’s insurer-ended happily and the insurer had to foot the bill.

Company Fires President

Cade-Grayson, a Southern California-based employer specializing in dehydrated food, fired its president, Steven Cade, when it allegedly caught him altering inspection certificates and substituting inferior ingredients for more expensive ones in its products. A few months later, Cade sued Cade-Grayson for wrongful termination and then started a competing company.

About the same time, Cade-Grayson learned its former president was telling important vendors that the company was experiencing financial difficulty and could go bankrupt. In response, a Cade-Grayson manager sent a memo to its inside and outside sales representatives advising them how to respond to inquiries regarding the company’s financial status. It stated:

I would recommend the following response concerning Cade-Grayson and Steve Cade’s status.


  1. Cade-Grayson is financially sound and values your business.


  2. Steve Cade was terminated by Cade-Grayson Company for acts involving dishonesty.


  3. We cannot provide further details because the company is in litigation with Mr. Cade and our lawyers advise us not to go into specifics at this time.

Someone Has To Pay

When Cade found out about the memo, he added a claim for defamation to his lawsuit. He was ultimately awarded $1 million for the damage to his reputation.After losing the case, Cade-Grayson started a long battle with its general liability carrier, Nationwide Mutual Insurance, over who should pay the jury award. Cade-Grayson’s policy had a standard exclusion for claims involving “employment-related practices,” and Nationwide denied coverage.However, Cade-Grayson said the dispute involved a competitor, not an employee, and therefore should be covered. The federal Ninth Circuit Court of Appeal eventually sided with Cade-Grayson and ordered Nationwide to pay the bill.

Actions To Take Now-A 4-Point Checklist

You can’t prevent former employees from saying bad things about your organization. But you can take these four steps to help safeguard your business relationships with customers and vendors and to avoid being sued for defamation:


  1. Require employees to sign nondisclosure agreements. Have new em- ployees sign an agreement not to disclose trade secrets and confidential information, including your organization’s financial condition and methods of operation. These agreements can be an effective psychological and legal deterrent to a former employee who might want to get back at you by spreading negative information.


  2. Anticipate the need for damage control. When you make a major change in personnel, such as replacing an executive or other key staff member, consider immediately sending a letter to customers and vendors to announce the change. You can also reaffirm your commitment to excellent service and introduce the person’s replacement. This enables you to put your company in a positive light first, especially if the parting was not friendly and you anticipate problems.


  3. Maintain confidentiality. To avoid retaliation charges, don’t disclose to customers or vendors that the former employee has filed a claim or sued your organization for discrimination or wrongful termination. Keep the reasons for the termination confidential and don’t say anything negative about the ex-employee.


  4. Submit claims to insurers. If you do get sued, contact your insurer at once. Although most business general liability policies exclude employment-related claims, this case opens the door-until insurers rewrite their policies-to possible coverage for certain post-employment claims by former workers. 


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