Defamation Litigation Threatens Fox News' Bottom Line: Lessons from Dominion and Beyond

The recent $787 million defamation lawsuit filed by California Governor Gavin Newsom against Fox News marks a pivotal moment for media firms entangled with polarized political figures. This case, mirroring the 2023 Dominion Voting Systems settlement, raises urgent questions about the financial and reputational risks facing media conglomerates like Fox's parent company, News Corp (NWSA). As defamation litigation becomes a recurring liability, investors must assess how these legal battles could reshape valuations, deter advertisers, and further erode public trust in traditional news outlets.

The Newsom Lawsuit: A New Front in the Defamation Wars

Governor Newsom's lawsuit alleges Fox News knowingly amplified former President Donald Trump's false claim of a June 9 phone call, despite evidence confirming their last conversation was on June 7. Fox anchor Jesse Watters' segment, which displayed a chyron reading “Gavin Lied About Trump's Call,” is central to the defamation claim. Newsom's legal team, led by attorney Mark Bankson (who secured a $49.3M verdict against Alex Jones), argues Fox demonstrated “actual malice” by recklessly disregarding call logs and editing Trump's remarks to omit key context. This parallels Dominion's successful case, where Fox executives' internal communications revealed awareness of false claims about voting machine fraud.

The $787 million demand—identical to Dominion's settlement—is no coincidence. It signals Newsom's intent to hold Fox to the same standard of accountability, framing the lawsuit as a defense of factual reporting against partisan propaganda. If Fox faces repeated litigation over similar claims, the cumulative legal costs could strain its financial stability, particularly amid declining trust in traditional media.

Dominion Case: A Blueprint for Future Litigation

The Dominion settlement, finalized in April 2023, set a critical precedent. Fox News' parent company, News Corp, paid $787.5 million after a Delaware court ruled it acted with “reckless disregard for the truth” by promoting false election fraud narratives. Internal emails revealed executives prioritized viewership over accuracy, a pattern Newsom's lawyers allege persists.

Following Dominion, News Corp's stock dipped briefly but recovered as investors bet on settlements becoming routine. However, the Newsom case—and potential follow-ups—could test this resilience. Analysts at Goldman Sachs estimate media companies tied to partisan figures now face a 15-20% higher litigation risk premium, with defamation claims eroding EBITDA margins by 2-3% annually.

Reputational Risks and Murdoch's Media Empire

Fox News is the crown jewel of Rupert Murdoch's media empire, contributing disproportionately to News Corp's valuation. A sustained reputational decline could pressure the stock, especially if advertisers flee. The lawsuit's focus on Fox's “propaganda machine” narrative aligns with a broader societal shift: a Morning Consult poll shows 68% of U.S. adults distrust traditional news outlets, up from 57% in 2019.

Investors should note that News Corp's enterprise value-to-EBITDA multiple (currently 9.5x) already reflects some of these risks. However, if legal costs balloon or advertisers defect, the multiple could compress further. Competitors like Discovery (DISCA) or AT&T's Warner Bros. Discovery, which rely less on partisan content, may gain relative favor.

Investor Concerns: Legal Costs and Trust in Media

The Dominion settlement alone accounted for ~15% of News Corp's 2022 operating cash flow. While the company has ~$1.5 billion in liquidity, repeated litigation could strain these buffers. More concerning is the potential for copycat lawsuits. Smartmatic Corp's ongoing $2.7 billion case against Fox—and similar claims by election workers—suggest this is a multi-front battle.

Meanwhile, public trust in Fox News has plummeted. A Pew Research study found only 34% of Americans trust Fox News as a reliable source, down from 44% in 2019. This distrust may deter advertisers, with brands increasingly favoring neutral platforms. Procter & Gamble and Coca-Cola, for instance, reduced ad spend on partisan media after backlash over election misinformation.

What's Next for Fox? Mitigation Strategies and Market Reactions

Fox has two paths: settle quickly to avoid reputational damage or litigate aggressively, risking prolonged scrutiny. Newsom's offer to dismiss the lawsuit if Fox retracts the claims and issues a public apology could avert a costly trial. However, Fox's refusal to apologize in the Dominion case—despite paying damages—hints at a preference for quiet settlements.

Investors should monitor:
1. Legal Reserves: Does News Corp's $1 billion in reserves cover escalating claims?
2. Stock Performance: A dip below its 52-week low ($17.50) could signal sustained pressure.
3. Ad Revenue Trends: Declines in advertising could accelerate if brands continue to pull spending.

Investment Takeaways

• Short-Term: Consider hedging News Corp exposure with put options if litigation fears spike.
• Long-Term: Avoid overvalued media stocks tied to partisan content; favor diversified players like Disney (DIS) or Paramount Global (PARA).
• Monitor Trends: Track settlements like Smartmatic's outcome, which could set a higher financial precedent than Dominion.

The Newsom lawsuit underscores a grim reality: media firms amplifying partisan falsehoods face escalating legal and reputational costs. For investors, this is more than a Fox News issue—it's a sector-wide reckoning with the price of profit-driven misinformation.

Stay cautious on News Corp unless the company pivots decisively toward neutral reporting—or settles swiftly to contain the damage. The era of unchecked partisan media may finally be ending, and the bill is coming due.