Can Small Business Owners Sue When Their Companies Are Defamed?

As a small-business owner, can you sue for defamation personally if someone makes a false and damaging statement about your business? The answer will depend to a large degree on the size of your company and the extent to which the public views you and your company as one and the same. The determining factor is whether a false statement made only about your business (and not about you personally) nevertheless tends to degrade your personal reputation in the eyes and ears of those who hear the statement. If you own XYZ Company and XYZ has 1000 employees, a statement falsely accusing XYZ of producing a defective widget will not necessarily lower you as an individual in the eyes of the community. On the other hand, if XYZ Company is a single-member LLC with no employees or contractors on staff, the very same statement might be deemed to have the “sufficient nexus” that Virginia law requires to make the statement actionable by the business owner individually (as well as the business itself).

Under Virginia law, defamation requires (1) publication of (2) an actionable statement with (3) the requisite intent. What we’re talking about here is the second element of that test, which requires among other things that the statement at issue be “of and concerning” the person or entity bringing the lawsuit. To win a defamation case, you have to show that the statement at issue was intended to refer to you specifically and people who heard it understood it as such. A preliminary question for the judge is whether a reasonable person hearing or reading the statement could conclude that the defamatory statement was essentially “about” the plaintiff, even if the plaintiff is not mentioned by name in the statement.

The general rule is that corporate owners cannot sue for defamation in their individual capacities when the defamatory statement relates only to the corporate entity itself. The Virginia Supreme Court has carved out an exception to this rule, however, applicable when there is a “sufficient nexus” between business owners, their companies, and the statement such that allegations “of and concerning” the business would tend to affect not just the reputation of the business but also of its owner. (See Schaecher v. Bouffault, 290 Va. 83, 100, 772 S.E.2d 589, 598 (2015)).

Want to see how this works in the real world? Check out Rosenthal v. R.W. Smith Company, decided earlier this month by the Western District of Virginia. This case involved a common scenario: a general contractor hires a subcontractor to do some work, the subcontractor hires its own subcontractors, and then a dispute arises about when the sub-subcontractors are supposed to get paid.

R.W. Smith Company was the general contractor, hired for a project relating to the renovation of a Kroger store. It hired M.E.P. Mechanical, Inc. (“MEP”), to do the plumbing work. Richard Rosenthal was the President and principal shareholder of MEP. MEP hired subcontractors to provide additional labor, and several of them did not get paid on time. Rosenthal brought a defamation claim against R.W. Smith based on alleged statements its agents made to MEP’s subcontractors claiming that R.W. Smith had already paid MEP for the subcontractors’ work. The result of these allegedly false statements was that MEP’s subcontractors blamed MEP for their lack of payment rather than RWS. Rosenthal alleged that the statements made it appear that “MEP was stiffing the business-300x200subcontractors for their services rather than reflecting the reality that RWS was the party that had failed to pay.”

So the question for the court was whether these statements about MEP–the party that had hired the subcontractors and that would have been responsible for paying them–had a sufficient nexus with Mr. Rosenthal as to render the statements “of and concerning” him as an individual. And the court held that they did.

While acknowledging that the statements themselves referenced only MEP as a business, other evidence suggested that many of the recipients of the statements conflated MEP with Rosenthal and didn’t really distinguish between the two separate entities. For example, there was an email to Rosenthal saying “we have been told by [an R.W. Smith employee] that you have already been paid for our invoices.” Other communications from subcontractors made clear that they held Rosenthal personally responsible for MEP’s failure to pay. Some called him a “con-man.” One said “You are the type of company that gives this country a bad name.”

The court denied the motion to dismiss the defamation claim, finding the accusations were sufficiently “of and concerning” the plaintiff. So yes, under appropriate circumstances, small business owners may be able to bring defamation actions in their individual capacities when the businesses they own are defamed.

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