Prof. Doug Lichtman, UCLA School of Law
February 7, 2013

Copyright lawyers well know that the First Amendment cannot be read too literally.  Yes, the First Amendment tells us that Congress shall “make no law … abridging the freedom of speech.”  But, as copyright lawyers also well know, copyright law is itself a law, made by Congress, which restricts speech in the sense that it stops certain people from saying and otherwise expressing certain things.  Want to write a new major motion picture about the Batman universe of characters, for instance?  Well, you are not allowed to, at least not without Warner Brothers’ permission, and the reason is a (perfectly appropriate) legal rule written by Congress that restricts your speech.

As a copyright scholar, then, I have found it interesting this week to see the First Amendment conversation that has arisen in response to the Department of Justice’s just-filed fraud case against the credit rating agency, Standard & Poor’s.  For those of you not following the fight, Standard & Poor’s – more commonly, S&P – is an entity that rates various types of financial risk.  It might tell investors that a given investment is triple-A, for example, by which it would be telling investors that the investment is a relatively safe investment that will likely return the investors’ capital.  This week, the Department of Justice joined forces with several state attorneys general to sue S&P for what the government describes as “falsely represent[ing] that its credit ratings of [certain financial investments] were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P’s analytic judgment, and reflected S&P’s true current opinion regarding the credit risks.”  Among the responses from S&P and its supporters has been a vague First Amendment defense, intuitively arguing that credit ratings are opinions and hence are protected speech.

In a Word, No.

1.  The government’s theory is not that the credit ratings were wrong and hence S&P should be liable for the billions of dollars that investors arguably lost as a result.  That theory would be hard to sustain, because credit ratings might well be the type of opinion that the First Amendment does protect.  Just like I can tell you that I think the “Twilight” movies were a colossal failure in story-telling, and I can do so without worry that the relevant writers, directors, and actors would sue me, so too S&P might plausibly argue that it can tell its customers that (say) some package of mortgage-backed securities is a fantastically safe investment.  The First Amendment leaves a lot of room for public commentary, whether right or wrong, positive or negative.

2.  The government’s theory, however, is that S&P knowingly lied when it represented that its opinion was truly felt.  That is, the government has marshaled evidence that S&P was knowingly slanting its ratings in favor of certain clients and that it did so because that would help S&P make more money.  That allegation is a lot stronger from a First Amendment perspective because it targets not the rating itself, but the factual assurances that were made to the public alongside the rating.  And yes, S&P always told its customers not to rely too heavily on S&P’s work; and yes, large institutional investors probably should have done some of their own research before deploying hundreds of millions of dollars behind any of the at-issue financial vehicles; but, here, the government’s point is that S&P did publicly promise that it was offering objective advice, untainted by S&P’s own corporate interests.  If S&P failed to follow through on that promise, the government has a case here, albeit a case where the court needs to now understand other issues, like the degree to which S&P’s alleged fib in fact caused the harm that ensued.

3.  Relatedly, the press is making much of the fact that S&P employees wrote some plainly ridiculous and somewhat insulting things when they e-mailed and texted privately among themselves during the relevant period.  There were jokes, for instance, where one S&P analyst would tell another S&P analyst that S&P would (say) favorably rate a financial instrument even if it were created by cows.  These sorts of communications remind us that, while speech is free, speech can also be costly.  Here, loose employee language will come back to haunt S&P.  That said, however, what seems shocking in a quick-hit news article is not necessarily going to end up carrying much weight in court.  After all, S&P will be able to honestly explain that people in every industry tend to joke about their work in ways that would look bad in isolation but in fact are not particularly meaningful in reality.  Moreover, any trial here would take weeks.  The shock value of this evidence might start out high; but after a few weeks, and in comparison to all the other more substantive evidence that would come in, it would likely seem less interesting and important.