WASHINGTON — A century-old California law meant to stop rumormongers from triggering bank runs is suddenly being threatened by free speech protections.

Long before the Internet and social media, the law was among 20 state statutes enacted following the 1907 banking panic to bar the spread of false information harmful to a bank's condition. That panic, among other things, helped create the Federal Reserve System as a defense against economic crises.

But in a case involving allegedly hostile statements an ex-employee posted on Craigslist about Summit Bank, a $189 million-asset institution in Oakland, the state's appeals court has ruled the law as unconstitutional and that the defendant, Robert Rogers, is protected by the First Amendment.

"We find section 1327 cannot be reconciled with modern constitutional requirements," the appeals court said, referring to the state law, in a 30-page opinion.

Thanks in large part to federal deposit insurance, bank runs hardly pose the same risk today as when the law was created. But following some high-profile examples of elevated deposit outflows during the 2008 crisis both in the U.S. and abroad, including IndyMac Bank and Washington Mutual, legal observers said that the protection of statements that could lead to withdrawals may have a significant impact.

"This case has profound implications about the scope of the First Amendment and the use of social media to provide critical commentary on the safety and soundness of particular banks," said V. Gerard Comizio, a partner at Paul Hastings.

In its decision, the court in the state's first appellate district remanded for further review a lower court ruling that had denied Rogers' motion to strike the bank's complaint. The higher court essentially said the state's law, which the bank had cited in an argument that Rogers' speech was not protected, ran afoul of more recent interpretations of the First Amendment.

That law prohibits statements that are "untrue in fact and … directly or by inference derogatory" to a bank's condition. Even though it was enacted in 1917, the appeals court said no reported case has subjected it to interpretation.

"When analyzed under modern constitutional jurisprudence, the broad provisions of Financial Code section 1327, on their face, impermissibly sweep within their proscriptions speech that cannot be criminally punished," the appeals court said.

According to several recent call reports, Summit Bank appears to be in strong financial condition, with a consistent string of quarterly profits and a total risk-based capital ratio of nearly 16% at the end of March. Representatives for Summit Bank did not return calls seeking comment.

Rogers, a former vice president and chief credit administrator, allegedly posted anonymous statements on Craigslist's "Rants and Raves" section indicating he was a disgruntled employee. He allegedly posted vulgar comments about the bank's chief executive officer and her son, as well as statements suggesting the bank was in trouble. A posting on July 25, 2009, said: "I would suggest that anyone that banks at Summit Bank leave before they close."

(The bank, which sued for libel, was able to identify Rogers as the speaker by serving a subpoena to Craigslist for the information.)

Rogers' defense argued he was protected by the First Amendment, but the bank countered that the 1917 law targeting bank runs meant his statements should not be considered free speech.

But the appeals court said the bank had not presented enough evidence that Rogers' statements were illegal. They criticized the state provision as vague and having too broad a reach, and said the law lacks a requirement — included in other statutory restrictions on speech — that a speaker's statement be proven to be malicious.

"It is a criminal libel statute without a malice requirement, which is designed to prohibit speech based on its content," the court said. "It fails to give persons of ordinary intelligence fair notice of what is forbidden. It sets no discernible limits on what types of speech can be criminalized, and, allowing such free range, it lends itself to arbitrary enforcement."

The court also said Rogers was protected under free speech standards because his statements attracted public interest.

"We reject the bank's characterization of Rogers's posts as merely the musings of a disgruntled former employee about private matters which are of no interest to anyone but the participants," the opinion read. "The fact that Rogers's posts drew numerous comments, including comments vehemently disagreeing with Rogers, suggests that the broad topic of the financial stability of our banking system, and the narrow topic of the bank and its personnel and activities, are matters of public discourse and are of considerable public interest."

Yet observers say the condition of financial institutions may further debate over whether laws prohibiting false speech about a bank's health should stand.

"While the First Amendment certainly provides broad protection to analyze and comment on banking matters, and even provide sharp and critical commentary, the U.S. Supreme Court has consistently held that the First Amendment does not give a person a constitutionally protected right to falsely cry 'fire' in a crowded movie theatre," Comizio said. "The real question here is whether attempting to trigger a bank run arguably has a similar impact."

The most notable case from the recent crisis of a statement leading to deposit withdrawals was when IndyMac Bank, which was already headed toward insolvency, spiraled from customers taking out their money. There, the run was precipitated by a publicly released letter by Sen. Charles Schumer with warnings about the bank's problems.

The California Bankers Association filed an amicus brief for Summit Bank. Leland Chan, the group's general counsel, acknowledged that the court's reading of the state's anti-bank run law "was not incorrect," but he said his group still filed a brief "because it at least warranted an explanation about the reason that there is this law."

"Since the advent of FDIC insurance after the Great Depression, the idea of a bank run is really not foremost in people's minds and really hasn't been a factor. We do live in a fairly stable banking environment, and if it is unstable it's for reasons other than because people are slandering banks," Chan said. "But it is a big deal if you look at what happened with IndyMac when Sen. Schumer made his comments. That would not have even been covered by this law because his comments were not unfactual. Yet even a truthful statement led to an outtake of deposits … that led to its failure."

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