With U.S. markets fretting Tuesday at the prospect of a downgrade in the government’s triple-A credit rating, you may be wondering: Who can we sue? Litigation, after all, is practically an unalienable American right. The problem, however, is that any attempt to sue the credit rating agencies for downgrading U.S. securities will run smack into the Bill of Rights. The rating agencies, as many a disgruntled mortgage-backed securities investor has discovered in the last few years, are shielded from liability because their ratings are considered to be public opinion protected by the First Amendment of the U.S. Constitution.
The agencies’ First Amendment protection dates back at least to 1999, when the U.S. Court of Appeals for the Tenth Circuit upheld a Colorado judge’s dismissal of a case against Moody’s Investor’s Services. The Jefferson County School District had sued Moody’s, claiming that the credit rating agency published an unfair assessment of the district’s 1993 bond offering. (The suit alleged that Moody’s was retaliating because the district hired other agencies to rate the bonds, but that wasn’t important in the case’s outcome.) Jefferson County, which had to re-price the bonds after the unfavorable Moody’s report, claimed the rating agency had illegally interfered with its bond offering and also committed antitrust violations.
The trial court treated Moody’s as a member of the media and found that the First Amendment protected its report on the school district bond offering from both state and federal claims. On appeal, the school board argued that the report was not protected free speech, but the Tenth Circuit disagreed. The appellate panel didn’t even waste much time discussing the trial court’s assumption that Moody’s is entitled to the same First Amendment protection as, say, Reuters. Instead, the Tenth Circuit opinion analyzed the allegedly false statements in the Moody’s report and concluded they’re too vague to be “provably false,” so Moody’s was constitutionally protected.
In a similar 1999 case, a Santa Ana, California, federal district judge granted summary judgment to Standard & Poor’s parent McGraw-Hill Companies, finding that a credit rating agency’s opinion must be issued with actual malice to lose its First Amendment protection. (That’s the same standard that applies for journalists.) In the Santa Ana case, Orange County claimed that S&P had granted too rosy a rating to county bond offerings. It sued for negligence and breach of contract, but the court held that Orange County would have to show actual malice by S&P to proceed with either claim. The County couldn’t make the requisite showing, so its case was tossed.
The software outfit Compuware Corp had a stronger case for actual malice, considering that it accused Moody’s of unreasonably downgrading its credit rating (instead of issuing an overly-optimistic assessment, as Orange County claimed S&P had). But in a 2005 suit against the rating agency, Compuware argued that it shouldn’t have to show actual malice to proceed with a breach of contract case. The U.S. Court of Appeals for the Sixth Circuit nevertheless upheld the actual malice standard in a 2007 opinion that seems to take for granted the notion that credit rating agency products are protected by the First Amendment.