@S,N, Thank you for passing on that unbelievable ( believable ) account of what happened to a colleague of yours. I had not even considered the implications that you mention, and it is sombering to think an allegation like this before even decided by a impartial third party would get out to the Net.
That is really frightening. I certainly feel for him and I am glad he was able to get back to his career. It reminds me of the time I once had a boss who I was on friendly terms with, one day just out of the blue as we sat at our workstations talking, he just decide to drop my name in Google search to see what would come up. Thankfully nothing did, but it is the fact that it is just that easy to have your entire career ruined over an plain lie.
Google needs to expand their efforts in this regard, they have lost in Europe over this I believe and it is high time this industry's leading search engine bear some responsibility ( especially in terms of Libel ) for the results it posts.
And I agree with your points about the reasons someone does or does not sue. Word gets around quickly and if you are in a small industry, it could mean moving on. A personal choice for each individual of course, I have been faced with it a few times and I have been forced to be a pragmatist about the entire situation - in order to fight another day.