SEXUAL HARASSMENT LIABILITY: NOT JUST A PROBLEM FOR THE HARASSER
Two decisions handed down by the U.S. Supreme Court on June 26, 1998 impact significantly employers' liability for sexual harassment and redefine what D&Os should do to prevent and respond to sexual harassment by supervisory employees. In the two cases, Faragher v. City of Boca Raton, 1998 WL 336322 (1998) and Burlington Industries, Inc. v. Ellerth, 1998 WL 336326 (1998), the Supreme Court held that an employer is liable for sexual harassment by supervisory employees, whether or not the employer knew or should have known that the harassment occurred. However, according to the Court, the employer is not liable if the employer can show that it "exercised reasonable care to prevent and correct promptly any sexually harassing behavior" and that the employee "failed to take advantage" of those corrective measures.
The Court's holding signifies the beginning of a new era in the law of sexual harassment. Although the full scope and significance of the rulings cannot be determined until the lower courts begin to apply the law in specific factual situations, one thing that is clear -- the decisions will likely increase the number of sexual harassment claims filed for supervisor misconduct and make it more important than ever for D&Os to establish and enforce strong and comprehensive anti-harassment policy and procedures designed to uncover and remedy harassment in the workplace.
These new decisions do not change the liability of the individual harasser, but do materially increase the liability exposure and required conduct of the employer relating to sexual harassment. If D&Os fail to create, implement and enforce the necessary company policy and procedures consistent with these new rulings, they may violate their duties to the company and thus may be liable to the company and its shareholders for losses resulting from sexual harassment by other supervisory employees.
In Faragher, the plaintiff worked as a life guard for the City of Boca Raton, Florida. Beginning in 1985, Faragher's supervisors (Bill Terry and David Silverman) subjected her and other female lifeguards to uninvited and offensive touching, made lewd remarks and spoke of women in offensive terms. In February 1986, the City adopted a sexual harassment policy in the form of a memorandum from the City Manager to all employees. In May 1990, the city revised and reissued the policy, circulated the revised policy to some employees, but completely failed to distribute it to the employees of the marine safety section, where Faragher worked.
Faragher did not complain to higher management about Terry or Silverman. In June 1990, she resigned to attend law school. In April 1990, two months before Faragher's resignation, another former female lifeguard, Nancy Ewanchew, wrote a letter to the City's Personnel Director complaining that Terry and Silverman had harassed her and other female lifeguards. The City investigated the complaint and found that Terry and Silverman had behaved improperly, reprimanded them and required them to choose between a suspension without pay or the forfeiture of annual leave.
The Supreme Court concluded that the City should be liable for the sexual harassment by Terry and Silverman. In reaching its decision, the Supreme Court concluded that hostile environment sexual harassment should be found to be within the scope of a supervisor's employment (and thus the employer should be vicariously liable for the harassment), in part because such harassment is now well-recognized as a persistent problem and the employer should reasonably anticipate the possibility of such conduct occurring in the workplace. Thus, according to the Court, losses resulting from such harassment should be considered one of the employer’s "normal risks" of doing business. The Court acknowledged that under this theory an employer would automatically be responsible for the hostile environment harassment committed by a supervisor. However, it recognized an affirmative defense to the employer’s liability if the employer shows that:
- it "exercised reasonable care to prevent and correct promptly any sexually harassing behavior," and
- the "plaintiff employee unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer or to avoid harm otherwise."
The Court determined that this affirmative defense was not available to the City, though, because the City had entirely failed to disseminate its sexual harassment policy to the beach employees, its officials made no attempt to keep track of the conduct of supervisors like Terry and Silverman, and the policy failed to indicate that the harassing supervisors could be bypassed in registering complaints.
In Burlington, employee Kimberly Ellerth quit her job after fifteen months as a sales person in one of Burlington Industries' many divisions, claiming that she had been subjected to constant sexual harassment by one of her mid-level supervisors, Ted Slowick. The harassment, as alleged by Ellerth, took the form of repeated sexually-oriented remarks and gestures. Several of the alleged remarks "could be construed as threats" to deny Ellerth tangible job benefits, but no such job benefits were actually denied. During her tenure at Burlington, Ellerth did not inform anyone in authority of Slowick's conduct despite knowing Burlington had a policy against sexual harassment.
As in Faragher, the Supreme Court applied common law agency principles to conclude that an employer should be held vicariously liable for hostile environment harassment committed by supervisory employees who abuse their authority, even if the employer neither knew nor should have known about the conduct. The Court explained that the standard for imposing liability on the employer is whether the agency relationship (between the supervisor and the employer) "aids in the commission" of the harassment. The Court then determined that in traditional quid pro quo sexual harassment claims, where the supervisor takes action that affects a tangible job benefit of or imposes a job detriment on the harassed employee, the agency relation standard will "always be met" and an employer will not be able to escape liability. Where, however, a supervisor engages in hostile environment harassment that does not culminate in a tangible employment action or decision, an employer may escape liability by establishing by a preponderance of the evidence that it has procedures and mechanisms in place designed to prevent and remedy potential harassment and that the employee failed to take advantage of those procedures.
In so holding, the Court explicitly recognized that the harassment need not result in a tangible job detriment (e.g., termination or the denial of a raise, promotion, etc.) to be actionable. Indeed, it now appears that an employer is responsible for a hostile environment created by unfulfilled threats that do not culminate in a tangible employment action unless it can establish the affirmative defense set forth in Faragher.
The Supreme Court's rulings do not affect the underlying standard for when conduct constitutes actionable sexual harassment. It remains the law that the plaintiff must show that a sexually objectionable environment is "objectively and subjectively offensive, one that a reasonable person would find hostile or abusive, and one that the victim in fact did perceive to be so." The Court reinforced the notion that Title VII is not a "general civility code," and instructed the trial courts to filter out complaints attacking "the ordinary tribulations of the workplace, such as the sporadic use of abusive language, gender bias-related jokes, and occasional teasing." The Court made it clear the conduct must be "extreme" to amount to a change in the terms and conditions of employment.
Having said that, however, the Court clearly places the burden on the employer (i.e. directors and officers) to prevent sexual harassment in the workplace. The Court noted with approval EEOC guidelines advising employers "to take all steps necessary to prevent sexual harassment from occurring, such as . . . informing employees of their rights to raise and how to raise the issue of harassment." Of particular note to employers with larger work forces, in Faragher, the Court opined that a city with departments in far flung locations could not reasonably conclude that they could effectively prevent sexual harassment without communicating some formal policy against harassment, with a sensible complaint procedure. Thus, it is now more important than ever for directors and officers to articulate clear policies prohibiting sexual harassment, to encourage employees to report potentially offensive conduct, and to have procedures in place to investigate and remedy harassment that does occur.
Directors and officers can respond to these new decisions by ensuring that the corporation institutes the following measures:
1. Establish and enforce an active and firm policy against sexual harassment, and effective complaint procedures, emphasizing that sexually offensive behavior will not be tolerated:
- Alternate complaint procedures are essential: Because the harasser is often the employee's supervisor, the policy must provide alternative channels through which employees can bring complaints to the attention of appropriate employer representatives.
- Cooperation is essential: The policy should clearly state that all employees, supervisors and members of management are to cooperate fully with any investigation of workplace harassment and that failure to cooperate fully could result in disciplinary action, up to and including dismissal.
- No retaliation clause: The policy should clearly state that there will be no retaliation or adverse employment action for making a complaint of sexual harassment.
- Circulation and publication: A corporation should distribute its sexual harassment policy to each new employee as well as clearly post the policy throughout the workplace. To reinforce the policy against workplace harassment, a corporation should periodically recirculate its harassment policy at least annually.
2. Institute sexual harassment prevention training:
- Annual seminars: Corporations should hold a sexual harassment prevention seminar at least once per year.
- Investigative techniques: Personnel officials should be trained how to fairly and confidentially investigate sexual harassment complaints.
3. Conduct an annual survey: A yearly anonymous survey of employees' morale and perceptions of the workplace can help highlight problems that some workers may be reluctant to bring to the attention of supervisors.
Sexual harassment is now a significant liability exposure for not only the harasser, but also the corporation. D&Os should promptly respond to this new corporate exposure with effective prevention measures.
Claims-Made Settlements: An Idea Whose Time Has Come?
As explained in recent editions of The ACE Report, settlements in securities class action lawsuits against directors, officers and others are increasing in magnitude, largely in response to the Securities Litigation Reform Act of 1995. Therefore, it is now more important than ever for defendants and insurers to be particularly diligent in negotiating and structuring class action settlements in ways which minimize their collective costs for these settlements.
One method of reducing the actual costs of a securities class action settlement is to structure the settlement as a "claims-made" settlement, which generally allows the defendants (and their insurers) to recoup that portion of a settlement attributable to shares in the class that do not file proper proofs of claim with the settlement administrator. Although this type of settlement structure has been occasionally used for many years, a recent Ninth Circuit Court of Appeals decision, combined with plaintiffs counsels’ insistence on larger fees, may result in this type of settlement becoming more prevalent.
What is a claims-made settlement?
Securities class action lawsuits are typically settled by the defendants pay a defined amount into an escrow account. Each member of the class is given notice of the settlement and instructed to file with the settlement administrator a proof of claim which establishes that person’s status as a class member and the number of shares which that person owns as part of the class. Upon court approval, plaintiffs counsel’s fees are paid out of the settlement escrow account and the balance is divided among those shares which are in the class and for which a valid proof of claim has been filed. The more proofs of claim that are filed, the smaller the settlement amount which is paid per share, and vice versa.
In a claims-made settlement, the amount paid for each share participating in the settlement is determined when the settlement is agreed upon by dividing the gross settlement amount by the total number of shares which could potentially participate in the settlement (i.e. the "float"), regardless of the number of shares that actually file valid proofs of claim. If some shares in the class fail to file a valid proof of claim (which almost always occurs), the per share settlement amount attributable to those shares reverts to the defendants (and their insurers) who funded the settlement escrow account. In other words, the settlement is effectively a per share settlement amount rather than an aggregate settlement amount, and the defendants ultimately pay only the per share settlement amount for those shares that submit valid proofs of claim.
Because the number of shares actually participating in the settlement is not known until after the claims administration process has been completed, defendants in a claims-made settlement must initially pay into the settlement escrow account an aggregate nominal settlement amount without knowing what portion of that amount will ultimately be paid to shareholders and what portion will revert to the defendants. The percentage of shares in the class which are likely to file valid proofs of claim (and thus that portion of the aggregate nominal settlement amount which eventually reverts to the defendants) is dependent upon several factors unique to each case, such as the percentage of eligible shares held by institutional investors (who are more likely to file proofs because of their fiduciary obligations), the per share settlement payment available, the average number of shares held by each shareholder, and the age of the class (i.e. the time between the end of the class period and the settlement).
Why might claims-made settlements be more popular now?
The benefits to defendants from a claims-made settlement structure are obvious. The reason this type of settlement has to date been somewhat rare is the unwillingness of plaintiffs’ counsel to agree to this type of structure. Plaintiffs’ counsel have feared that the court will determine their fee award based upon a percentage of the amount actually paid to class members rather than based upon a percentage of the maximum potential amount which would be paid if all shares in the class filed valid proofs of claim (i.e. the aggregate nominal settlement amount). In other words, should the fee award for plaintiffs’ counsel be based upon the total settlement value available to the class (whether or not class members elect to participate in the settlement) or should the award be based only on the amount actually paid to class members?
The Ninth Circuit Federal Court of Appeals recently resolved this issue by ruling that plaintiffs’ counsel fees in a claims-made settlement should be determined based on the aggregate nominal settlement amount, not the amount actually paid to class members. Williams v. MGM-Pathe Communications Co., 129 F.3d 1026 (9th Cir. 1997). This court decision should give plaintiffs’ counsel greater comfort that their fee award will not be adversely effected by use of a claims-made settlement and thus may increase the availability of this attractive settlement structure in the future.
The ACE group of companies provides insurance and reinsurance to a diverse group of international clients. Operating subsidiaries are based in Bermuda, the United States, the United Kingdom (Lloyd's) and the Republic of Ireland. At June 30, 1998, ACE Limited has approximately $3.5 billion in shareholders' equity and $8.0 billion in assets.