The Appellate Division, First Department, at 27 Madison Ave.
The Appellate Division, First Department, at 27 Madison Ave. (NYLJ/Rick Kopstein)

A Manhattan appellate court has set a standard to test claims of defamation by implication, finally addressing an open question that the Court of Appeals said almost 20 years ago was unanswered.

“To survive a motion to dismiss a claim for defamation by implication where the factual statements at issue are substantially true, the plaintiff must make a rigorous showing that the language of the communication as a whole can be reasonably read both to impart a defamatory inference and to affirmatively suggest that the author intended or endorsed that inference,” Appellate Division, First Department, Justice Paul Feinman wrote for the panel in Stepanov v. Dow Jones & Company, 11593.

The standard struck the right balance between a plaintiff’s right to recovery and a defendant’s First Amendment protections for “publishing substantially truthful statements,” the judge said.

In applying that standard, the panel yesterday upheld a lower court’s dismissal of the defamation action that businessman Maxim Stepanov and his Cyprus-based company, Midland Consult (Cyprus), brought against Dow Jones for an April 2011 Barron’s magazine article about a Russian embezzlement conspiracy.

By ruling on what test to apply to defamation by implication claims, the panel reached an “open question” that the state Court of Appeals said would have to “await another day” in a 1995 decision.

Justices Rolando Acosta, David Saxe, Karla Moskowitz and Sallie Manzanet-Daniels joined Feinman.

The case was argued Jan. 8.

The suit centered on three paragraphs in a 40-paragraph Barron’s article, entitled “Crime and Punishment in Putin’s Russia.”

The article detailed a $230 million fraudulent tax refund scheme. Bank records from an informant and a complaint filed with the Swiss federal attorney general appeared to supply the factual basis for most of the article’s statements, the court said.

The article noted that after the refund at issue, large money transfers went from “dummy corporations” to Credit Suisse accounts that were intended as payments to a tax official and her deputies.

The article noted a January 2008 transaction where the Credit Suisse account got about $3 million from a “shell company” named Bristoll Export, “which had been registered in New Zealand by a company-formation agency called GT Group.”

The article said New Zealand authorities raided GT Group offices in October 2010, after its previous coverage that the group sold shell corporations to individuals linked to activities including the laundering of Mexican drug cartel money.

“Nested inside the shell of Bristoll Export—like a Russian doll— was yet another shell company whose directors work at Midland Consult, a Russia-focused representative of offshore banks founded by a former Russian diplomat named Maxim A. Stepanov in Cyprus,” the article said.

The story quoted Stepanov as commenting that his customers were “honest, decent businessmen and have no criminal conduct found by the Courts of Justice.”

Stepanov and Midland Consult sued, saying it was “false, disparaging, derogatory, and misleading to state or imply” Midland was doing business with GT Group in 2010, when GT allegedly sold shell corporations to individuals linked to weapons and drugs and the commissioning of a North Korea-bound plane filled with weapons.

Moreover, they claimed it was defamatory to say Bristoll Export or subsidiaries had directors “who work at Midland Consult.”

In an affidavit, Stepanov said Midland was not involved with Bristoll Export until after the January 2008 transaction and Midland severed ties with GT Group before its “legal troubles.” Either Midland should have been omitted from the article or the time line should have been included, he argued.

Stepanov also argued it was “false, disparaging, derogatory and misleading” for the article to imply that he was involved in corruption by failing to mention that he was no longer working as a diplomat when Putin took office.

Dow Jones said the article was not defamatory because it was “substantially true” and was not “of and concerning” the plaintiffs or capable of defamatory meaning. The company also said it could only be held liable for what was written, and nothing in the article implied plaintiffs were involved in wrongdoing.

Acting Manhattan Supreme Court Justice Ellen Coin granted Dow Jones’ dismissal motion in April 2013.

Feinman said on “express defamation” grounds, Stepanov’s claims failed because they were linked to “substantially true statements that are not reasonably susceptible of defamation connotations.”

When taking up the chief argument of defamation by implication, Feinman noted the 1995 state Court of Appeals in Armstrong v. Simon Schuster, 85 NY2d 373, said different courts across the country adopted different standards on the issue.

But the Armstrong court said the claim arising from James Stewart’s book “Den of Thieves” was an allegation of false statement of verifiable fact.

Stepanov called for a standard that did not require a showing that the defendant “intended or endorsed a defamatory inference.”

Because Stepanov was not a public figure who had to show a statement was made with actual malice, he argued, he should not be asked to show the author meant or endorsed a defamatory implication.

Feinman said the argument “conflate[d] two entirely separate issues.” The actual malice rule pertained to the author’s state of mind at publication.

The “standard at issue here is the threshold question of whether a statement is capable of a defamatory implication,” he wrote, saying a person’s public or private status is irrelevant to the inquiry.

Applying the standard in the current matter, Feinman said for example that the omission of a time line on Bristoll’s link to Midland was “minor.”

As for the mention of the GT Group’s dealings, Feinman said, “the clear implication … was to show that the Bristoll transaction was suspicious. It cannot reasonably be read to imply that plaintiffs were somehow involved in the schemes to launder Mexican drug cartel money or transport North Korean weapons.”

As for the complaint about the identifier of Stepanov as a “former Russian diplomat,” Feinman said the article did not claim corruption in the country’s diplomatic ranks, nor did it imply Stepanov was involved in corruption.

In a statement, a Dow Jones spokeswoman said “we are very gratified with the court’s ruling, which not only validates the strength of the Barron’s article, but also adopts a rigorous new standard in New York that will apply in future libel by implication claims.”

Dow Jones was represented by Laura Handman, a partner at Davis Wright Tremaine, and Camille Calman, an associate at the firm. Dow Jones was also represented by Jason Conti, vice president and associate general counsel for the company.

Steven Skulnik, of counsel at Ganfer & Shore, represented Stepanov and Midland Consult. “We are of course disappointed in result and will review the opinion carefully to consider further steps in this litigation.”