By Craig A. Newman and Eric S. Rosen

When an anonymous critic attacks a company’s reputation online, the initial reaction is often to launch an expensive legal offensive to quiet the damaging criticism. However, before jumping headfirst into a costly and potentially risky litigation strategy, companies should consider whether they are using the court system to vindicate their protected legal rights or whether they are turning to litigation in an attempt to stifle unfair, albeit protected, criticism.

A lesson can be learned from a recent case involving USA Technologies, a NASDAQ-listed company that supplies products for devices such as vending machines and photocopiers. The company is in a tough spot, with its stock price having plunged more than 99% during the past decade. Despite this poor performance, the board of directors has continued to compensate company management handsomely.

As a result, the blogosphere has not been kind to USAT. One commentator, writing under the pseudonym “Stokklerk” on the Yahoo! Finance message board, accused USAT’s CEO of having a “worldview” where “humanity exist[ed] to be fleeced,” and stated that USAT had committed “legalized highway robbery” and was operating its business as a “soft Ponzi” scheme. Stokklerk further posted that “two top people at USAT” had “skimmed over $30M” from USAT by promoting a “story to lure investors and then” have the management approve “massive pay packages” that bore no correlation to company performance.

USAT fought back. On August 27, 2009, USAT filed a “John Doe” lawsuit against Stokklerk in federal court, setting forth claims of securities fraud and defamation. USAT also asked the Court to issue a subpoena directing Yahoo! to produce Stokklerk’s IP address so that USAT could determine Stokklerk’s identity.

Stokklerk moved to quash the subpoena, and in a decision issued on May 17, 2010, the court agreed and effectively ended USAT’s lawsuit. The judge felt that Stokkler’s statements were either protected opinion or mere “rhetorical hyperbole” and “insults.” USAT is now left in the unenviable position of having to explain to its board of directors (as well as the investment community and media) why it pursued an ultimately unsuccessful legal battle to silence an anonymous online pundit engaged in highly critical, but protected, commentary concerning USAT’s financial performance.

Even worse for USAT, under a new California statute, which awards attorneys’ fees to anonymous online commentators who are subjected to vexatious lawsuits, USAT might have to pay for the legal fees Stokklerk incurred in filing his motion to quash.

USAT finds itself in the position that it is in because the First Amendment to the Constitution protects not only the right to free speech but also the right to speak anonymously. In a series of cases starting in the 1950s, the U.S. Supreme Court has repeatedly struck down laws that have required speakers to disclose their identity to the public because of the chilling effect on the exercise of the right to free speech.

This principle that allows speakers to engage in anonymous debate is not new. At the time of our country’s founding, the authors of the Federalist papers published anonymously under the name “Publius,” while the anti-federalists responded with similarly anonymous articles authored by “Cato” and “Brutus.”

The Supreme Court has not specifically addressed the issue of whether the First Amendment protects anonymous speech on the Internet, but in a 1997 case, the Court stated that there is “no basis for qualifying the level of First Amendment protection that should be applied to” the Internet.

The right to remain anonymous, online or offline, is not absolute. Just like a patron cannot yell “Fire!” in a crowded theatre, the Constitution does not protect an online commentator’s right to engage in speech that is libelous, defamatory or otherwise violates the law.

Faced with these competing principles – a commentator’s right to remain anonymous against a victim’s right to seek remedies for violations of the law — courts have struggled over which legal principles to apply when there is a challenge to an online speaker’s cloak of anonymity.

At first, courts applied a “good faith basis” test, whereby the party seeking the information had to allege only a “legitimate, good faith basis” that he was the victim of actionable conduct — i.e., that he was defamed or suffered some other type of actionable injury. This standard, however, proved too low, as companies took advantage of this liberal standard to use the judicial system to silence unwelcome critics.

Courts reacted by developing stringent tests that generally impose a high burden and require a party to put forth substantial evidence to compel the disclosure of an anonymous online critic. This protects commentators’ First Amendment right to remain anonymous by ensuring that the legal system is not used to “harass or embarrass the speaker or stifle legitimate criticism,” while at the same time, the standard is not so insurmountable that plaintiffs will not be entitled to prosecute a legitimate claim against an anonymous commentator.

USAT’s strategy against Stokklerk shows that a legal battle is not always the best answer to dealing with an online critic. Before jumping into often costly and risky litigation, a company should evaluate its case closely and explore both its legal and non-legal options, which can include, for example, a well thought out public response.

While a lawsuit and subpoena can sometimes be an effective way to put a halt to unlawful conduct, if a company is merely trying to muzzle protected speech, it is far better off saving its legal firepower and confronting the criticism straight on.

Craig A. Newman is a partner at Richards, Kibbe and Orbe, a New York law firm, and Eric S. Rosen is an associate at the firm.