A federal judge has quashed a high-profile attempt to force Johnson & Johnson to present shareholders with a proposal requiring the use of arbitration, instead of the courts, to resolve their legal disputes with the company.

In his June 30, 2021 Memorandum Opinion and Order, Judge Michael A. Shipp of the U.S. District Court of New Jersey granted Defendants’ motion to dismiss a complaint filed by Harvard Law School Professor Hal S. Scott and the Doris Behr 2012 Irrevocable Trust (“Trust”). Plaintiffs in The Doris Behr 2012 Irrevocable Trust, et al. v. Johnson & Johnson sought declaratory and injunctive relief from Johnson & Johnson for allegedly violating Section 14(a) of the Securities Exchange Act by excluding the Trust’s proposal to change the company’s bylaws from the proxy materials issued for its April 2019 shareholder meeting.

Public pension funds and their advocates mobilized to oppose the lawsuit, which offered the strange spectacle of a shareholder recurring to the courts to prevent future investors from doing the same. The New Jersey Attorney General, the California Public Employees’ Retirement System and the Colorado Public Employees’ Retirement Association all intervened on Johnson & Johnson’s behalf in asking the judge to dismiss the claims. Cohen Milstein was among the law firms working on behalf of institutional investor clients concerned about the potential repercussions of the lawsuit, which was the latest in a long line of initiatives led by Scott to curb shareholder rights and “overregulation.”

Before the April 2019 shareholder meeting, Johnson & Johnson had sought and received a “no-action letter” from the Securities and Exchange Commission supporting its decision to shelve the forced arbitration proposal presented by Scott. The New Jersey Attorney General had also asked the SEC to allow Johnson & Johnson to exclude the proposal, opining that it would violate New Jersey state law. Judge Shipp stayed the case in late 2019 to allow the Delaware Supreme Court to issue its decision in Salzberg v. Sciabacucchi, reopening the case in June 2020 after it was decided. Scott’s second amended complaint cited Salzberg, saying the decision invalidated arguments by Defendants and the New Jersey Attorney General that the forced arbitration proposal, if adopted, would violate New Jersey law. The second amended complaint sought declaratory relief—asking the Court to issue a declaration that the forced arbitration proposal would be legal under federal and New Jersey law—and dropped Plaintiffs’ previous petition for injunctive relief.

In his 10-page decision dismissing Plaintiffs’ complaint in its entirety, Judge Shipp sided squarely with Defendant-intervenors who argued that the Trust’s claims should be rejected on multiple grounds. First, the Court agreed with Defendant-intervenors that Plaintiffs’ demand for declaratory relief was moot since Johnson & Johnson excluded the proposal from proxy materials for its 2019 annual meeting and declaratory relief “cannot be obtained for alleged past wrongs.” He also agreed that Plaintiffs’ request for declaratory relief was not ripe for consideration “because any controversy with respect to a proposal that the Trust might submit in connection with future shareholder meetings is hypothetical on future events, including this Court issuing a declaration that the proposal is legal under both federal and state law.” On the question of whether Plaintiffs deserve declaratory relief, Judge Shipp said the Trust would not “face hardship if the Court refuses to rule on the legality of the Trust’s proposal” and because “the requested declaratory relief would amount to an advisory opinion,” which federal courts are not entitled to grant.

The victory for investors comes amid signs that the SEC may consider formalizing its traditional opposition to public corporations that seek to include forced arbitration clauses in their governing or offering documents. Under the Trump administration, the Treasury Department had alarmed investor advocates when it urged the SEC to consider allowing companies to require shareholders to use arbitration, an idea that was later publicly supported by two Republican SEC Commissioners.

But in two appearances before Congress this year, new SEC Chair Gary Gensler has firmly supported the importance of preserving shareholders’ access to the courts. In his most recent testimony before the House Financial Services Committee in May, Gensler was asked if it would violate federal securities law to insert a forced arbitration provision into a public company’s governing documents. “The SEC has said consistently to issuers, as I understand it, that it would be best not to put this into these corporate charters,” Gensler responded. “And I think the American public needs to be able to have redress to their courts. That’s sort of a fundamental piece to be able to go straight to the courts. And that’s been true in terms of issuers for decades. And I think that’s worked well.”

The Summer 2021 issue of the Shareholder Advocate includes:

• Directors and Officers Face Potential Liability under Section 14(a) for their Roles in Ohio’s Largest Bribery Scheme – Amy Miller and Richard A. Speirs
• The Escalating Litigation Involving Actuarial Equivalence on Taft-Hartley Plans: No End in Sight – Michelle C. Yau
• In Set Capital, Second Circuit Reinstates Investors’ Claims Against Issuers of Popular ‘Fear Index’ Security – Michael B. Eisenkraft
• Federal Judge Dismisses Latest Lawsuit Seeking to Legitimize Forced Arbitration – Richard E. Lorant
• Fiduciary Focus: One Thing the Pandemic Won’t Change is the Need for Trustees to Focus on Fundamentals – Luke Bierman

Fiduciary Focus
Shareholder Advocate Summer 2021

As the United States slowly but steadily returns from the depths of the pandemic, many practices that became usual over the last year remain uncertain in the continuation. Will we continue to work from home? Will we continue to meet online? Will we continue to dress casually or, in some notorious cases, at all? Will we live, work and play in cities, in high rises, in proximity? Will the incidence of retirement skyrocket? Will birth rates remain low? Will we invest in online technologies and divest from REITS with shopping malls? What will the future hold for the many aspects of administering and investing a pension fund?

Certainly these and many other questions will take time to sort out, with their answers offering significant fodder for discussion around trustee and senior staff tables, if not Zoom screens. The fiduciary responsibility that guides these kinds of considerations, however, remains the same. Focusing on the exclusive obligation to serve beneficiaries’ interests is the standard that guides trustees and senior staff, whether within or outside a pandemic. While the calculus may adjust due to changing circumstances tied to the impact of a global pandemic, the process for considering any social, political, cultural, and economic evolutions is unchanged. Fiduciary destiny requires being well informed on those circumstances and fully focused on the fund’s beneficiaries. When in doubt, go back to basics.

Despite these many adjustments and their possible accommodations due to the shared global experiences over the past year and a half, there are many considerations that seem very familiar: everything old may just be new again. For example, recent reporting indicates that the U.S. Department of Labor is again reconsidering whether changes to the standards for environmental, social, and governance (“ESG”) investing are warranted. We all are well aware of the long history of yo-yoing regulatory adjustments the attention to ESG has inspired. Here we go again.

Likewise, disparities in opportunity in investing, corner offices and board rooms are receiving renewed and enhanced attention after a year of clear and often tragic evidence of racism, sexism and other bias in many aspects of American life. The 9th Circuit recently permitted a lawsuit challenging California’s statutory requirement for greater gender representation on boards of local corporations to go forward, which will likely impact the viability of a lawsuit challenging a similar California statute mandating racial and ethnic representation. Here we go again.

And issues related to climate change remain prominent. For example, Exxon must accommodate new board directors who would not be characterized as fossil fuel apologists and were elected with help from pension funds that increasingly are finding their voices on these important issues. Here we go again.

As the world returns to some semblance of the familiar, pension fund trustees and senior staff must likewise find their ways through both knowns and unknowns. There will be plenty of each to navigate but the guiding principles of fiduciary responsibility remain the same regardless of the issue, old or new, familiar or novel. Back to basics with pinpoint focus on the exclusive benefit rule is a safe approach with the virtue of providing helpful guidance. Everything old is indeed new again—including the fiduciary responsibilities shared by the trustees and senior staff of America’s public pension funds.

On May 11, 2021, in Employees Retirement System of the City of St. Louis v. Jones, No. 2:20-cv-04813, 2021 WL 1890490 (S.D. Ohio May 11, 2021), Chief Judge Algenon L. Marbley of the U.S. District Court for the Southern District of Ohio upheld all claims in a shareholder derivative action seeking to hold certain current and former FirstEnergy Corp. (“FirstEnergy” or the “Company”) directors and officers accountable for their roles in orchestrating one of Ohio’s largest public bribery schemes. Specifically, the Court found Plaintiffs had sufficiently alleged Section 14(a) derivative claims under the Securities Exchange Act of 1934 concerning FirstEnergy’s issuance of false and misleading proxy statements from 2018 through 2020 related to its shareholders’ annual meeting and the re-election of the Company’s directors. This determination allows the Court to exercise supplemental jurisdiction over Plaintiffs’ state law claims, including breach of fiduciary duty and unjust enrichment related to the same criminal scheme. The Court then held that demand was futile on the majority of the FirstEnergy board of directors (the “Board”) under Rule 23.1 of the Federal Rules of Civil Procedure, and that Plaintiffs had standing to assert their state law claims too.

Cohen Milstein Sellers & Toll PLLC represents one of the Plaintiffs in the litigation. This decision represents an important victory for investors because the Court further expanded upon the view that a company’s directors cannot solicit shareholders’ votes using a misleading proxy statement that conceals a company’s illegal activities and the company’s true financial status. The Court held that a misleading proxy statement can provide an “essential link” in causing harm to a company for purposes of establishing Section 14(a) claims in the context of the re-election of directors.

Here, Plaintiffs alleged that between 2017 and 2020, FirstEnergy and its most senior officers paid more than $60 million in illegal contributions to Ohio’s Speaker of the House, Larry Householder, and other Ohio public officials, in exchange for favorable legislation designed to bail out FirstEnergy’s failing nuclear plants. The U.S. Attorney for the Southern District of Ohio described this plot as “likely the largest bribery, money laundering scheme ever perpetrated against the people of the State of Ohio.”

Notably, the bribery scheme began a few days after Householder assumed his office on January 3, 2017, when FirstEnergy flew him to Washington, D.C. on the Company’s private jet to attend President Trump’s inauguration. Within two months of this trip, FirstEnergy and its subsidiaries began making payments to Householder’s secret 501(c) (4) entity. Householder then pushed through House Bill 6 (“HB6”), which according to the FBI, was “essentially created to prevent the shutdown of [FirstEnergy’s] nuclear plants.” Notably, HB6 included a “decoupling” provision that ensured a guaranteed level of income for FirstEnergy, and therefore established a floor for Defendants’ performance-based compensation. Even before charges of misconduct arose, the public strongly opposed HB6, and it was called the “worst energy bill of the 21st century.” In fact, FirstEnergy spent $38 million to defeat a referendum of HB6, while the media publicly questioned the propriety of FirstEnergy’s relationship with Householder. Plaintiffs further alleged that the directors were aware of shareholders’ concerns about the Company’s lobbying efforts and campaign contributions and took affirmative actions to conceal them. None of these material facts were disclosed in the Company’s proxy statements and other public filings.

The bribery scheme was exposed on July 21, 2020, when formal criminal charges were brought against Householder and others, and reports of FirstEnergy’s involvement surfaced soon thereafter. The Company’s stock value fell 45% in the aftermath, eliminating approximately $12 billion of stockholder value. In addition, securities analysts estimate that the Company faces between $500 million and $1 billion in future sanctions. By late April 2021, the Company had disclosed that it was in early discussions with federal prosecutors about a deferred prosecution agreement.

In the May 2021 ruling, Judge Marbley found that Plaintiffs had satisfied all four elements for their Section 14(a) claims related to the Company’s 2018, 2019, and 2020 proxy statements used to solicit FirstEnergy shareholders’ votes for director re-election and executive compensation approval. Judge Marbley explained how Plaintiffs’ allegations meet the heightened pleading requirements of the PSLRA because they alleged that “the Director Defendants caused the Company to issue Proxy Statements that concealed an illegal bribery scheme, its implications for FirstEnergy’s overall business and financial health, and the deficient governance practices at the Company that allowed it to proceed.” The Court then rejected Defendants’ argument that Plaintiffs must plead scienter (intent to deceive) for their level of culpability. Instead, Judge Marbley held that negligence was the appropriate standard to apply for Section 14(a) liability against corporate insiders, like Defendants. The Court further determined that Plaintiffs had alleged that the directors were at least negligent due to the numerous “red flags” that put them on notice of the bribery scandal, including public news reports and concerns raised by the Company’s shareholders.

Next, the Court held that the proxy statements issued by the directors were an “essential link” to causing harm to FirstEnergy. As the Court acknowledged, the Sixth Circuit has yet to define “transaction causation” in the context of the re-election of directors and executive compensation approval and Section 14(a). However, the Court rejected Defendants’ argument that Plaintiffs cannot establish causation because other courts find that injuries caused by “mismanagement or breach of fiduciary duty” are not redressable under proxy rules. Instead, the Court relied on those cases where courts had found causation in similar circumstances to those alleged by Plaintiffs. In fact, Judge Marbley highlighted how “[h]ere, Plaintiffs allege far more than more mismanagement or an isolated bad act. Rather, they have set forth in detail that the Director Defendants perpetrated an illicit bribery scheme and caused substantial risk to the Company that eventually resulted in the loss of nearly half of its stock value.”

After upholding Plaintiffs’ Section 14(a) claims, the Court then determined that those claims shared a common nucleus of operative facts with Plaintiffs’ state law claims because they all related to the same criminal scheme. The Court, therefore, exercised supplemental jurisdiction over the state law claims to determine whether Plaintiffs had adequately alleged demand futility under Rule 23.1 of the Civil Rules of Procedure. Notably, the Court held that Plaintiffs had met their burden to show demand futility in two ways. First, the Court found that Plaintiffs’ allegations were plausible that a majority of the Board was directly overseeing the Company’s most senior officers’ illicit political activities, including the five members of the Corporate Governance Committee. Second, the Court found that the complaint’s allegations were also excused demand because a majority of the Board faces a substantial likelihood of liability, since they acted with reckless disregard for the Company’s best interest. Specifically, Judge Marbley held that Plaintiffs’ “allegations together support the Court’s inference that a majority of the Director Defendants recklessly disregarded their duties to the Company and allowed the criminal scheme to continue unchecked.” The Court then concluded that because Plaintiffs have sufficiently pled demand futility they had standing to bring all their state law claims. The Court, thus, denied Defendants’ motion to dismiss on all counts.

This decision as an important ruling in the area of proxy statement disclosures and solicitation of stockholder votes as the Court found a direct causal link between the misleading proxy statement and issues of voting on director elections and executive compensation—issues of paramount importance in the area of corporate governance.

To the individuals and families affected by the devastating Champlain Towers South condominium building collapse in Surfside, Florida, we send our deepest condolences.

While first responders and city, county, and federal authorities work to understand how a building failure of this magnitude occurred, we have prepared a list of frequently asked questions (FAQs) about personal injury, property damage, and wrongful death claims.

NOTE: This document should not be interpreted as legal advice. We do, however, encourage those affected by the tragic collapse of the Champlain Towers South condominium building to seek legal counsel.

What Should I Do If I Was Injured or My Property Was Damaged in the Collapse?

There are several important steps you may consider taking if you or a loved one has been personally injured or if your property has been damaged or destroyed due to the Champlain Towers South condominium collapse in Surfside, Florida.

• If You Were Injured, Seek Immediate Medical Care

If you were injured in any way from this incident, or believe you may have been injured, it is important that you seek medical care as quickly as possible. Obtaining proof of your injury through medical care is a crucial step in establishing any potential claim you may have for your injury or loss. Insurance agencies will want to see documented proof of injury before any compensation can be considered. Some injuries are not readily obvious and by failing to seek medical attention quickly you risk your own health as well as your ability to pursue financial compensation.

• Get Copies of Your Medical Records

When visiting medical facilities or doctors regarding your injury, be sure to keep a detailed log of your appointments and obtain a copy of your medical records, including reports of any loss of functionality in your work or personal life, doctor evaluations and reports, medications administered, medical treatments provided or recommended, pharmaceutical prescriptions, and results of lab work.

• Document the Details of the Accident

While the incident is still fresh in your mind, write down a detailed accounting of everything that you remember.

• Where were you when the building collapsed? Did you hear or see anything just prior to the collapse or in the days or weeks leading up to the collapse?
• Be sure to include the time, the number and location of your unit, and the names of any other people who were with you.
• Did you notice any important details just prior to or after the incident?
• Take pictures of your injuries and, if possible, pictures of the location where you were injured and any dangerous conditions that caused your injuries.
• If you speak with medical providers or safety professionals, takes notes about your conversations.

• Property Damage? Make a List of Your Belongings

You should also make a detailed list of your belongings that were contained within the collapsed building or within a damaged surrounding area.

• Provide a detailed explanation for any items that are irreplaceable or were unique, such as heirlooms or antiques with intangible value.
• If you have photos or videos of the items that were inside your home, make sure to document these as you identify the scope of your losses.  You may find that family members or friends will have photographs or videos taken in your home on prior occasions, which will depict items you lost. Also check your social media postings for documentation of your possessions.

• Use Caution When Communicating with An Insurance Company on Your Own

When asked about the incident, be sure to use facts only. Say only the truth of what you know and do not exaggerate any claims or details regarding them.

• You are not obligated to answer questions that you do not honestly know the answer to. Don’t be afraid to tell an insurance representative that you do not know a response to a particular question. Having no answer is better than the wrong answer.
• Do not give medical opinions about your injuries and whether or not existing injuries you have may influence your injuries from the collapse. Leave the medical diagnosis to the professionals.
• If an insurance representative ever askes you to provide a written or audio recorded statement, you have the right to refuse. Providing such statements may be used against you to diminish your case or claim.

• Do I Have a Case for Personal Injury or Property Damage?

If you or a loved one were injured, or your property was damaged in the Champlain Towers South condominium building collapse, you may have a legal claim. We encourage you to seek legal counsel as soon as possible to assess your legal claims.

• Do I Have a Case for Wrongful Death?

In Florida, the personal representative of someone who died as a result of the negligence or intentional misconduct of one or more parties can file an action for wrongful death on behalf of the victim’s estate and certain surviving family members. Such a claim must be filed within two years of the victim’s death.

While pertinent facts regarding the cause of the Champlain Towers South condominium building collapse are still being investigated by local, state, and federal authorities, we encourage to seek legal counsel if you lost a loved one in this horrific tragedy.

• Additional Resources

The unforeseen loss of a loved one or a home can be traumatic and challenging. We encourage you to seek legal counsel in order to assess whether you may have any legal claims as a result of the Champlain Towers South condominium building collapse. Additionally, the following local resources may be able to assist you with any other questions or concerns you may have.

• Surfside Community Center – Champlain Tower South Information & Resources: The town of Surfside is working closely with Federal Emergency Management Agency (FEMA) and county and state agencies, as well as local religious organizations and relief organizations, such as the Red Cross and United Way, to help families affected by the Champlain Towers South condominium building collapse. The Surfside Family Reunification Hotline is: 305-614-1819
• Miami-Dade County – Surfside Family Assistance: The county of Miami-Dade is also working closely with federal, state, and local agencies and first responders, as well as local religious organizations and the Red Cross and United Way in aiding families and other people affected by the Champlain Towers South condominium building collapse.
• American Red Cross – Building Collapse in Surfside, Miami Dade County: The American Red Cross is providing emergency hotel lodging for residents and others displaced by the crisis. Red Cross volunteers, including specially trained disaster mental health and spiritual care volunteers are providing one-on-one support to those coping with this tragedy, are available at the Surfside Community Center — which is a safe space for people to receive emotional support, get something to eat and drink, connect with community organizations offering aid, and hear updates from authorities

If you have questions about your legal rights or if you are seeking legal counsel, please contact us.

Cohen Milstein’s Complex Tort Litigation practice is a nationally recognized, premier trial practice focused on Catastrophic Injury & Wrongful Death claims. Based in Palm Beach Gardens, FL, we represent individuals throughout Florida and nationally who have suffered catastrophic injuries, wrongful death, and property loss due to unsafe products, unsafe construction, as well as toxic substances, and medical negligence.

Our primary objectives are to ensure injured victims receive just restitution through the court system and to hold responsible parties accountable.

For more information, please contact Theodore J. Leopold or Leslie M. Kroeger, co-chairs of Cohen Milstein’s Complex Tort Litigation practice at 1-877-515-7955.

We are at a crossroads that will determine how the nation’s workers can protect their own rights as the defense bar is working feverishly to erect barricades to the few remaining legal avenues workers have left to address workplace disputes.

With the enthusiastic support of the U.S. Supreme Court, large employers have overwhelmingly required their workers to submit their workplace disputes to binding arbitration and forbids them from pursing their claims together. But after many workers have pursued similar claims in arbitration—rather than abandoning them as employers may expect—employers are now being counseled to make arbitration more challenging and expensive to the workers.

A legislative solution exists that would level the arbitral playing field: the Protecting the Right to Organize (PRO) Act of 2021 (H.R. 842), the union-backed bill that would protect workers’ ability to pursue arbitration claims in groups. The House passed the bill in March, and it is now before a Democrat-controlled Senate for the first time and gaining public support.

U.S. Supreme Court Set Hurdles

Both the Civil Rights Act of 1964 and the Fair Labor Standards Act provide a forum in federal court for employees to challenge discrimination and wage theft, but the Supreme Court has repeatedly acceded to the defense bar’s demands, enforcing arbitration agreements that foreclose litigation in court and that forbid workers from vindicating their rights collectively.

For example, in Epic Systems Corp. v. Lewis, the Supreme Court held that it did not violate the National Labor Relations Act—a statute protecting workers’ ability to organize—for employers to require employees to waive their right to pursue claims collectively or on a classwide basis in arbitration.

The Supreme Court went even further in Lamps Plus Inc. v. Varela, holding that an employer could not be compelled to arbitrate employee claims on a classwide basis where the arbitration agreement was ambiguous about whether class arbitration was permitted.

The PRO Act would statutorily reverse these decisions.

Notwithstanding these hurdles, workers have successfully pursued individual claims in arbitration, sometimes in large numbers and challenging the same unlawful conduct by the same corporations, even where it might have been more efficient to pursue class action lawsuits in court.

Employers Work to Curtail Worker’s Rights

Burdened by the costs associated with these cases, which the defense bar calls “mass arbitrations,” employers are now balking at the very arbitration procedures that they imposed on these workers in the first place.

After DoorDash recently failed to pay the required arbitration fees on time, Judge William Alsup in the Northern District of California compelled the company to pay its fees and arbitrate 5,010 delivery drivers’ cases. Alsup said “in irony upon irony, DoorDash now wishes to resort to a class-wide lawsuit, the very device it denied to the workers, to avoid its duty to arbitrate. This hypocrisy will not be blessed.”

Now, leading firms that represent employers have advanced proposals that would further curtail workers’ ability to assert their rights. After years of advocating on behalf of their corporate clients to impede workers’ ability to bring cases in court, and to bring class actions anywhere, these firms seek to make alternative adjudication procedures, such as arbitration, cost prohibitive to individual workers.

Some measures, such as the requirement that employees file a notice with the company or engage in informal alternative dispute resolution before filing, are disingenuous. Where the employer does not intend to negotiate such claims before they are filed, the provisions act merely as another hurdle to bringing a case.

Other proposals may undermine the very system employers have favored. Cost-splitting and fee-shifting provisions may not be enforceable at all because purportedly procedural arbitration provisions are not valid where they have the effect of waiving substantive rights.

Recognizing that forcing workers to pursue their claims in arbitration might not have the intended effect of minimizing the number of workers whose claims are pursued, the defense bar also proposes measures that can only be described, to use Judge Alsup’s term, as “hypocrisy.”

For example, it suggests that arbitration agreements include a provision, at the election of the employer, that employers be able to settle as a certified class the individual worker claims that its agreement required be pursued separately. Similarly, employers are counseled to develop procedures to arbitrate multiple claims in batches, assigned to a single arbitrator, and with a single fee for the employer.

Yet, an efficient means to adjudicate multiple cases already exists: class actions. Where claims are sufficiently similar to warrant their adjudication collectively, employers should permit those claims to proceed in a certified class action in the first place, not as a last resort when the employer has exhausted all other means of achieving an employer-friendly global resolution.

Since the passage of the Civil Rights Act of 1964 more than 50 years ago, workers’ access to the courts—and increasingly arbitral fora—has been eroded. Substantive rights are only as good as the procedures available to enforce them.

The PRO Act offers some hope that Congress will come to the rescue and enshrine protections for workers to organize and enforce their rights as a group. In the meantime, we must skeptically examine new defense proposals, and fight those unenforceable provisions that waive long-standing substantive rights to challenge discrimination and wage theft.

#     #     #

Stacy N. Cammarano is an associate in the Civil Rights and Employment practice group at Cohen Milstein Sellers & Toll PLLC.

Joseph M. Sellers is a partner at Cohen Milstein Sellers & Toll PLLC and chair of the Civil Rights and Employment practice group.

The authors represent workers challenging discrimination, wage theft, and other illegal employment practices—individually and through class actions—in arbitration and court.

In Wal-Mart Stores Inc. v. Dukes,[1] the U.S. Supreme Court on June 20, 2011, decertified a class of approximately 1.5 million women, depriving the group of the chance to vindicate claims of systemic workplace discrimination.

In doing so, the Supreme Court revised the requirements for establishing commonality, reversed decades of unanimous circuit authority permitting certification pursuant to Federal Rule of Civil Procedure 23(b)(2) for employment discrimination cases seeking back pay, in addition to injunctive relief, and required that any Title VII class action provide the employer with the opportunity to raise individual defenses.[2] While at the time some believed that Dukes would totally preclude pursuit of employment discrimination class actions, the last decade has shown that Dukes was not a death knell for employment class actions, although some features of the ruling have impeded progress more than others, and it has driven up the expense of such litigation significantly.

Commonality

Regarding commonality under Rule 23(a), and related consideration of predominance under Rule 23(b)(3), courts have certified a variety of discrimination class claims, under both disparate impact and disparate treatment theory.

Policies incorporating discretionary decision-making may demonstrate commonalty in disparate impact cases.

The Dukes court reaffirmed its 1988 holding in Watson v. Fort Worth Bank & Trust[3] that a system of delegated discretion may give rise to liability under Title VII in appropriate cases.[4] In order for such claims to demonstrate commonality where discretion had been delegated to multiple decision makers, the court required demonstrating a common mode of exercising discretion and identifying a specific employment practice.[5]

In McReynolds v. Merrill Lynch Pierce Fenner & Smith Inc.,[6] the U.S. Court of Appeals for the Seventh Circuit in 2012 reversed a denial of class certification. As Judge Richard Posner explained for a unanimous panel, the existence of a companywide personnel policy distinguished the case from the delegation of discretion in Dukes, which failed to qualify as a discrete, company personnel policy.[7]

The Seventh Circuit found dispositive that the discretion permitted by the challenged policies was exercised “within a framework established by the company.”[8] The policies at issue in McReynolds — one that permitted brokers to form teams pursuant to criteria of their choice and another that permitted the allocation of departing brokers’ accounts pursuant to criteria of the remaining brokers’ choice — constituted discrete personnel policies that permitted those administering them broad discretion in how to implement them.[9]

The Seventh Circuit concluded that challenges to these policies presented questions about their adverse effect that could generate answers common to the class.[10]

Similarly, in Ellis v. Costco Wholesale Corp.,[11] the U.S. District Court for the Northern District of California in 2012 certified challenges to policies permitting discretion. Like McReynolds, the Ellis court found that exercising discretion pursuant to discrete company policies satisfied the commonality requirement of Rule 23.[12]

A constellation of policies formed the framework for discretion: a promotion-from-within preference, a practice against posting management job vacancies, and the absence of a formal application process for promotions to certain management positions.[13]

As the U.S. District Court for the Eastern District of New York explained in Calibuso v. Bank of America Corp. in 2012:

Dukes did not foreclose all class action claims where there is a level of discretion afforded to individual managers … here plaintiffs allege that the implementation of companywide procedures [including the compensation system] results in a disparate impact on women.[14]

Where decision makers exercise their discretion in an environment polluted by gender stereotypes, that only reinforces the conclusion that they exercised their discretion in a common manner.[15]

Disparate impact challenges to nondiscretionary policies continue to easily satisfy commonality.[16]

For example, courts have found commonality based on disparate impact challenges to “tap on the shoulder” employee promotion systems, as in the U.S. District Court for the Southern District of New York’s 2012 decision in Chen-Oster v. Goldman, Sachs & Co.[17] In other cases, policies in which pay increases are set as a percentage of existing salary can not only perpetuate but also increase disparities in pay.[18]

Recently, challenges to reliance on prior salary in setting starting pay have been a focus of successful class certification rulings.[19] Relocation requirements have similarly been found to raise common questions.[20]

And of course written exams or physical abilities tests used for hiring or promotion continue to present clear cases for certification, as in the U.S. District Court for the District of Connecticut’s 2011 decision in Easterling v. State of Connecticut Department of Correction.[21]

The existence of a single decision maker helps demonstrate commonality in both disparate impact and disparate treatment claims.

The Dukes court noted that one way plaintiffs can identify a common mode of exercising discretion is to show that the discretion was exercised through some common direction.[22] The court also provided the example of “the assertion of discriminatory bias on the part of the same supervisor” as a type of claim that is dependent upon a common contention capable of classwide resolution.[23]

Subsequent courts have found that where decisions are made by a single person or small group, a common mode of exercising discretion or operation of a general policy of discrimination are more readily apparent.

For example in Ellis, the court found that “[t]op management’s involvement in the promotion process [was] … consistent, and pervasive, classwide.”[24]

And in Scott v. Family Dollar Stores Inc., the U.S. Court of Appeals for the Fourth Circuit noted that “discretionary authority exercised by high-level corporate decision-makers, which is applicable to a broad segment of the corporation’s employees, is more likely to satisfy the commonality requirement.”[25]

Commonality for a disparate treatment claim may be proved through statistical and anecdotal evidence.

Although the Supreme Court has not explained precisely what constitutes “significant proof” of a general policy of discrimination,[26] sufficient to satisfy the commonality requirement for class certification under a disparate treatment theory, multiple courts have addressed this issue.

In Brown v. Nucor Corp.,[27] the Fourth Circuit in 2015 held that statistical and anecdotal evidence could provide the “glue” satisfying the commonality standard set by Dukes, and therefore could be sufficient to show a general policy of discrimination causing injury across the class. The Brown court noted that unlike a disparate impact claim, “a showing of disparate treatment does not require the identification of a specific employment policy responsible for the discrimination.”[28]

Thus, statistical and anecdotal evidence showing a pattern of discrimination “can alone support a disparate treatment claim, even where the pattern is the result of discretionary decision-making.”[29]

As the Supreme Court explained in International Brotherhood of Teamsters v. United States in 1977, a decision the Dukes court reaffirmed,[30] pattern or practice claims may establish liability upon showing that discrimination was the “regular rather than the unusual practice.”[31]

Statistically significant disparities between the observed and expected results in the challenged personnel practices are sufficient to establish liability, although individual accounts of discrimination bring “the cold numbers convincingly to life.”[32]

Statistical analyses must account for the decision maker to ensure that observed disparities are not the result of just a few bad apples.[33] And while an analysis at the decision maker level may be required for some claims, courts examining disaggregated results must consider the pattern of those results.[34]

A company’s response to disparities as a classwide issue demonstrates commonality.

In Ellis, the court found that the plaintiffs had provided sufficient proof of commonality in part by showing that the defendant regarded gender disparities as a companywide issue, and had taken steps to increase diversity within the company in response to those widespread disparities.[35]

Thus, when a company addresses a lack of diversity as a classwide problem, this itself demonstrates the existence of a common issue capable of classwide resolution.

Rule 23(b) Issues

The Walmart v. Dukes decision has proved a bigger obstacle to satisfying Rule 23(b). For all but the simplest cases, the ruling bars certification under Rule 23(b)(2) of claims to back pay.

Thus, most class certifications have proceeded either under Rule 23(b)(3), when common questions can be shown to predominate, or certification of issues common to the class under Rule 23(c)(4).[36]

With respect to predominance, courts have expressed relatively little concern about the formulation of damages in evaluating predominance,[37] but have exhibited somewhat greater concern over whether individual defenses will predominate.[38] The existence of some individual defenses does not necessarily defeat predominance.[39]

Moreover, some defenses that may be raised individually can be resolved with common evidence for everyone in the class as to whom the defense is raised.[40] If the liability finding or other classwide evidence can resolve whether a certain factor is a legitimate basis for a difference in pay or denial of promotion, then the availability of that factor as a defense to individual remedial claims may be addressed with evidence common to the class that satisfies the predominance standard.

For those courts that have been hesitant to certify the class claims in their entirety, they have with increasing frequency certified those issues that can be adjudicated with evidence common to the class pursuant to Rule 23(c)(4).

While the plaintiffs in the Dukes case sought certification of their claims under Rule 23(b)(2) and, as a backup, under Rule 23(b)(3), they never pursued, and the Supreme Court never addressed, certification of discrete issues under Rule 23(c)(4). Courts have considerable discretion to certify issues pursuant to Rule 23(c)(4) when doing so would materially advance the resolution of the action.[41]

And an earlier split in the circuits has largely been resolved in confirming that only those issues subject to Rule 23(c)(4) need satisfy the Rule 23(b)(3) predominance requirement, not the entirety of the case.[42] As a result, certification is often sought pursuant to Rule 23(b)(3) and Rule 23(c)(4) in the alternative.[43]

The Legacy of Walmart v. Dukes

While the Walmart v. Dukes decision did not bring an end to certification of employment discrimination claims, it raised the bar for certification, making certification more expensive and time-consuming to achieve.

Courts applying the Dukes decision have wrestled with the meaning of the new standards it announced, such as what qualifies as “significant proof” of a pattern of discrimination, the common mode of exercising discretion, and what was meant by “trial by formula” — which the Supreme Court clarified in Tyson Foods Inc. v. Bouaphakeo in 2016.[44]

Class certification was once addressed early in the litigation, but regrettably, the Dukes decision has typically delayed it to a much later stage, where it now resembles adjudication of the merits.

More discovery is needed before class certification can even be fairly presented to the court,

driving up the cost of class certification, which has made pursuit of those claims prohibitively expensive for some. Moreover, in what must be a development welcomed by employers, after the Dukes decision, class claims have typically been smaller in scope, as they seek to follow guidance by the court to focus their claims challenging discretionary decision-making on a single or small group of decision makers.

. . .

Joseph M. Sellers is a partner, and chair and founder of the civil rights and employment practice group, at Cohen Milstein Sellers & Toll PLLC. Christine E. Webber is a partner at the firm.

Disclosure: Sellers and Webber represented Dukes and the plaintiff class in Wal-Mart Stores v. Dukes, and Sellers argued the case before the Supreme Court.

. . .

Download a copy of the article.

By: Julie Goldsmith Reiser and Louise Renne

Companies across the United States should be closely following the California State Legislature hearings on the “Silenced No More Act,” which would prevent the use of nondisclosure agreements (NDAs) to silence employees from speaking up about all forms of discrimination and harassment.

The legislation was introduced in response to the stunning claims brought forward by former Pinterest employees alleging a pattern of racial and gender discrimination, harassment and retaliation. They courageously called attention to the hypocrisy of Pinterest’s aspirational comments on social issues even though the company had required them to sign NDAs.

As attorneys who work with shareholders to hold companies accountable for this misconduct, these allegations have deeply impacted our work. They formed the basis of an ongoing shareholder derivative lawsuit that a state pension fund we represent brought against Pinterest’s board of directors and top executives for participating in and otherwise protecting powerful executives who are alleged to have discriminated against Pinterest employees.

The Silenced No More Act would extend existing laws that limit the use of NDAs. Such laws are important because NDAs are intended to protect executives by keeping their harassment, discrimination and retaliation under wraps. That NDAs chill the voices of employees who have already been victimized makes them even more toxic. NDAs cause women to fear reprisal from the company, sometimes even incorporating financial penalty clauses, long after their individual claims have been resolved.

The Silenced No More Act should pass swiftly and be a model for other states, but this is what all companies throughout the country should be doing on their own, rather than waiting for legislation to drag an ethical NDA policy out of them.

Failure to recognize this necessity will lead to future corporate scandals as multiple accounts of the same type of misconduct in the workplace come to light. It will continue to uphold an unsustainable corporate system where executives in positions of power assume they will be protected no matter how unlawful their behavior toward others in the workplace.

We have seen from our investigations the compounding impacts of NDAs and how they allow problems to fester over years.

The two of us, working with others and on behalf of Alphabet shareholders, were part of the team that led a groundbreaking $310 million settlement with the tech company that led to historic diversity, equity and inclusion (DEI) reforms at the company. That settlement was the result of a shareholder derivative lawsuit where stockholders alleged that executives and board members violated their fiduciary duties by enabling a double standard that allowed executives to sexually harass and discriminate against women without consequence.

In that case, we believe Alphabet’s “culture of concealment” was driven in large part by the silencing effects of NDAs.

The duration of misconduct, enabled by NDAs, goes far beyond Alphabet and Pinterest. There is no shortage of #MeToo scandals at powerful companies, many with presences in California, that were exacerbated by muzzling NDAs. Weinstein Company, Wynn Resorts, NBC and 21st Century Fox are prominent examples of companies that first tried to keep allegations quiet through the use of NDAs and later faced a firestorm of allegations from former employees.

Fortunately, the landscape surrounding discrimination and harassment in the workplace is changing. Shareholders, workers, customers and other key business stakeholders are becoming more active in demanding that companies stop protecting harassers.

All of this should send a message to boards and C-suite executives that they must set the tone from the top and they are far better off being proactive than reactive. That means actively creating a company culture where DEI is a foundational component — not an afterthought. It also means intentionally prioritizing transparency and proactively doing away with policies that are antithetical to that goal, like NDAs that are intentionally designed to suppress the voices of employees.

The public and shareholders want to be associated with companies that do right by their employees. Business should recognize this change from a culture of compliance to one of equity and inclusion and embrace this new reality by stopping the practice of requiring complainants to enter into NDAs and fostering a culture of inclusion and accountability.

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Julie Goldsmith Reiser is the co-chair of the Securities Litigation & Investor Protection group at national plaintiffs’ law firm Cohen Milstein Sellers & Toll.

Louise Renne is a founding partner of Renne Public Law Group and leads the firm’s public interest litigation.

The complete opinion piece can be viewed here.

Cohen Milstein’s Complex Tort Litigation practice group publishes the bi-weekly Complex Tort Eblast addressing a number of consumer safety and product liability issues. 

Is Your Swimming Pool Safe: A Quick Checklist on Pool Safety Standards

As drowning remains the number one unintentional cause of death for children in the U.S. ages 1 to 4, and the second leading cause among children ages 5 to 14, it is important to make pool and water safety a top priority this summer.

May is National Water Safety Month and Cohen Milstein’s Complex Tort Litigation team has prepared a quick checklist on what to look for when evaluating the safety of public swimming pools:

• Are there adequate layers of security? According to major safety organizations, including the American Red Cross, the U.S. Consumer Product Safety Commission, and the American Academy of Pediatrics, public swimming pools should have adequate layers of protection. At a minimum, all swimming pools should have a child safety fence with self-locking doors and gates.
• Is the pool really closed? American National Standard for Public Swimming Pools (ANSPS) advocates that when a public pool is closed for use, a secondary lock system be put in place to prevent access.
• Are utility or service gates secure? The International Swimming Pool and Spa Code recommends that gates not intended for pedestrian use, such as utility or service gates, remain locked when not in use.
• What happens during bad weather? Centers for Disease Control and Prevention advocates that swimming pool activity should be prohibited during inclement weather.
• Are there safety devices? ANSPS requires that public pools always have safety hooks and flotation devices mounted in easy to see places and that are readily available for use and that all pools with a slope transition have safety line anchors and a safety line in place.
• Who can perform CPR? ANSPS requires that a CPR-certified individual be on premises whenever a public pool is in use.

Cohen Milstein’s Complex Tort Litigation practice litigates Unsafe & Defective Products, and Wrongful Death & Catastrophic Injury claims related to swimming pool safety. If you’re interested in learning more about the firm’s Complex Tort Litigation practice, please email us, or call us at 561.515.1400.

We co-counsel nationwide.

By David Maser

In March of 2020 the COVID-19 coronavirus was declared a pandemic, and two COVID-related securities class action lawsuits were quickly filed. The filing of these cases led to a heated debate of whether plaintiffs’ attorneys would leverage the effects of the pandemic to file an increased amount of securities class actions.

A year ago, in April 2020, Kent Schmidt, a California attorney who specializes in defending businesses in litigation, said a “tsunami” of class-action lawsuits in three areas—consumer, employment, and shareholder cases—was already sweeping ashore. “These early filings can be indicative of the liabilities that companies should take into consideration and inform their practices now to avoid getting hit with one of these costly lawsuits,” he told Newsweek. “I think we’re going to see these cases play out for years.”

Mr. Schmidt’s view was not unique. Many in the defense bar quickly assumed that there would be an increase in the filing of securities fraud class actions, along with insurance, consumer, and other types of cases.

Perhaps not surprisingly, most lawyers who represent plaintiffs in shareholder lawsuits had a different opinion of whether the pandemic would lead to a wave of frivolous securities filings. “Trying to take advantage of a worldwide tragic epidemic disaster? I just hope those suits aren’t brought,” Steven J. Toll, Cohen Milstein’s Managing Partner and the Co-Chair of its Securities Litigation & Investor Protection practice, said to Reuters in March 2020.

To this point, the plaintiffs’ bar appears to have done a better job of forecasting—at least with respect to shareholder lawsuits. As of March 2021, a total of 28 coronavirus outbreak-related securities class action lawsuits have been filed. While 28 securities lawsuits over 12 months is not a small number, it hardly constitutes a flood of litigation, given the 300 to 400 securities class action filed each year.

Cohen Milstein Partner Laura Posner was recently quoted by Law360 as saying that the huge numbers of COVID-19 filings predicted by the defense bar had “largely not come to fruition.” In fact, Ms. Posner told Law360, she expected to soon see a return to normal filing levels of lawsuits, even against the pharmaceutical industry, “given where the country is in drug development relating to COVID-19.”

“There may be a few more cases involving allegations that a company’s projections or revenue and income representations were false and misleading, but assuming that the economy picks up as expected and we begin to return to a more ‘normal’ lifestyle, I think those cases will grow even less common as well,” she said.

Mr. Toll said the “tsunami” never came to pass in part because the unpredictable nature of the pandemic made it hard for plaintiffs to meet the heightened pleading standards required for securities fraud lawsuits to succeed.

“It would have been extremely difficult to show a direct link of any subsequent stock price decline to an earlier fraudulent statement about the pandemic—in other words, to connect the dots to satisfy the element of loss causation,” he told the Shareholder Advocate.

“When the pandemic hit and started to change the nature of how society functioned, it really wasn’t known what the impact would be,” Mr. Toll said. “Thus, it would be very hard to allege a company had the requisite intent under the securities laws to commit fraud—that it was intentionally or recklessly misleading the investing public about the impact of the pandemic on its future earnings or profitability.”

Finally, Mr. Toll said, U.S. stock markets’ broad and sharp decline in early 2020 followed by an equally broad upswing helped keep the number of shareholder lawsuits in check. “When most or all stocks in a particular segment decline, it makes it almost impossible to claim an alleged fraud caused this loss when similar stocks all declined in the same manner,” he said. When stocks across the board rise, he added, it erases any shareholder losses.

Meanwhile, it is also true that litigation in general increased during the pandemic. Law360 reports that restaurants, bars and businesses filed more than 6,900 lawsuits related to the pandemic in 2020 with nearly 1,400 filed over insurance coverage alone and are making their way both state and federal courts. For the most part, these lawsuits reflect the enormous economic and physical damages wrought by the COVID-19 pandemic on individuals and businesses across the country, who have turned to the courts for help when other remedies fail them.