In 2002 the American Academy of Arts and Sciences released a report entitled Evaluation and the Academy: Are We Doing the Right Thing? by Henry Rosovsky and Mathhew Hartley. Due to the fact that this report is protected by copyright law, a simple summary is given here. The report can be accessed at http://www.amacad.org/publications/monographs/Evaluation_and_the_Academy.pdf.
In synopsis of the situation, the report states that faculty write letters of recommendation as part of their normal routine evaluation of both students and colleagues. Based on a somewhat limited amount of evidence, letters seem plagued with the same type of problem present in grading, i.e. a lack of clear and meaningful distinctions between individuals. The authors suspecting this to stem, at least in part, from a fear of legal action, consulted the most authoritative legal advice they could find. This they found in Martin Michaelson of Hogan and Hartson in Washington, D.C., an expert on legal issues affecting higher education.
To summarize the situation from the legal standpoint: there now exist two opposing points of view. One is a fear of litigation proceedings that may result from candid disclosure of negative opinions in letters of recommendation. The other is that lack of disclosure of real and pertinent issues concerning the person or persons for whom the letter is written is legally dangerous.
Attorney Michaelson affirms the position that truth is a legal defense.