This is a sound factual circumstance for a good -- i.e., custom-tailored -- cease and desist letter to the former employer. I hardly ever recommend such letters, but here that is an appropriate strategy and likely to work.
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You state that your prior employer gives a "negative report". However, does that mean that it is untrue? For instance, if he were asked if he would rehire you and he said no, that would not be an untrue statement even though it would not be positive and might hurt your chances to get a new job. You need to know exactly what was said in response to reference requests so that you can determine whether your prior employer actually said something untrue (and what evidence you need in order to prove the statement was false).
You probably do not want to file a lawsuit in small claims court. A defamation case requires you to prove that the employer made false statements about you, that these statements were the reason you did not obtain a job, and the amount of damage you have incurred as a result. Small claims court does not provide you the tools to do these things.
You cannot testify about what other people have told you your former employer told them. That is double hearsay and while there is an exception for statements of a party opponent, you won't get past the second level of hearsay. This means that you will need to have witnesses appear in court to testify to exactly what your former boss told them. It is possible to subpoena witnesses for a small claims case, but it is generally better to address such things through the discovery processes available at higher level courts if you are serious about pursuing the matter. You will also have to prove that the statements are untrue and that the prospective employer would have hired you absent the false statements.
You will likely need to subpoena your prospective employers to testify about what they were told and to testify that they would have hired you absent the false statements. You might need to take depositions to nail down this evidence prior to taking the case to trial. Small claims court does allow subpoenas, but does not provide the other tools and if you are serious about pursuing it, you probably need to use a higher court (and probably need a lawyer).
As the other attorneys have advised, you can have a cease and desist letter sent. If necessary, you can take the matter to court. However, you are looking at a much bigger undertaking than small claims court and you will likely need an attorney and strong evidence to support your claims.
You can reach Harkess & Salter LLC at (303) 531-5380 or info@Harkess-Salter.com. Stephen Harkess is an attorney licensed in the state and federal courts of Colorado. This answer is for general information only and does not create an attorney client relationship between Stephen Harkess or Harkess & Salter LLC and any person. You should schedule a consultation with an attorney to discuss the specifics of your legal issues.