Shareholder derivative and class action lawsuits serve very different ends for shareholders, but which best serve their interests

It’s not the biggest derivative suit ever settled, but it is the biggest related to diversity, equity and inclusion (DEI) initiatives, with its $310 million (€363 million) fund for instituting workplace equity and board oversight reforms. Yes, I’m talking about the latest case win for shareholders against Alphabet, Google’s parent.

And it is a derivative suit rather than a class action suit. But what is the difference between the two?

In a class action, multiple plaintiffs join a suit as a class against defendants and seek compensation for damages, typically a loss in stock value and thus investment.

In a shareholder derivative lawsuit, shareholders sue executives and the board on behalf of all shareholders. Shareholders that are not part of the class ultimately end up paying the damages to those in the class, while in a derivative suit management and directors pay the damages.

So, clearly, from an economic standpoint, derivative suits are better for all shareholders, though damages are typically lower; millions rather than billions in the largest cases.

The Alphabet suit ended mandatory arbitration in harassment and discrimination disputes across all Alphabet entities, including Google, and instituted a raft of reforms, as well as the establishment of an advisory council.

“There’s an opportunity to make governance reforms that is not present in a typical class action suit” – Julie Reiser, Cohen Milstein

And that’s the second advantage to this type of case: reforms. Not that class action cases cannot include corporate governance reforms in their settlements, they sometimes do, but their primary aim is to secure damages. In contrast, derivative suits are primarily focused on preventing the issues that led to the suit in the first place – whether these are data breaches, correct labeling of opioid drugs or sexual harassment (the three most common subjects of this type of lawsuit).

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And with derivative suits, a much broader set of reforms can be introduced than is typical with shareholder resolutions, which must be focused on a narrow issue to get past the gatekeepers at the Securities and Exchange Commission.

I spoke to Julie Reiser, partner at law firm Cohen Milstein Sellers & Toll. She led the team which won the Alphabet case as well as the derivative suit at Wynn Resorts.

While she said that class action suits represent a much more reliable source of income for lawyers, there is still a robust group of law firms that focuses on derivative actions. Figuring out whether more such suits are being brought is difficult because they are less well reported. “In the Wynn Resorts case,” she said, “the only decision that survived on demand futility [where a corporate board’s decisions and/or decision-making are challenged] with respect to the accusations got very little coverage as it was pending in Clark County, Nevada and reporters couldn’t access the pleadings and so didn’t report on the case.”

Are derivative suits more likely to be successful than class actions? “Derivative suits have a chance for prospective change that are not present in cases where shareholders are trying to recover losses or employees are seeking to recover lost wages. There’s an opportunity to make governance reforms that is not present in a typical class action suit. It feels like you are solving a problem instead of just getting paid because there was misconduct.” She added that it seemed less and less common for class action suits to propose governance reforms; something that derivative suits are more effective at achieving anyway.

Derivative case-led reforms are more likely to pass the responsibility for implementation on to the board. In Alphabet, for example, the case didn’t need to identify every single person or group of people responsible for sexual misconduct, they simply had to prove that it was an issue over which the board had ineffective oversight. “We are saying to the board, you are responsible for overseeing this,” she said, “and you haven’t done your job and now you have to clean it up and come up with a mechanism that makes you accountable going forward.”

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Are derivative suits becoming more frequent?

Reiser said that they had always been around – the stock option backdating suits in the 1990s were all derivative suits.

The question was rather, she said, whether a high stock market meant more frequent derivative suits – a question related to the fact that most class action suits are triggered by a significant stock drop.

But in many cases, she said, securities fraud cases start out as class actions and then tag-along derivative suits are filed because the initial attempt at securing a lead plaintiff position is unsuccessful.

However, some cases are just better suited for derivative litigation.  For example, in the Wynn Resorts case, where the securities fraud case was unsuccessful, Reiser had a sense of investors pushing to create long-term value.

“When we were mediating the case, we had New York State and New York City [pension funds] and we had not just the legal team but also the corporate governance team.

“They were sitting across the table from the chair of the board and the general counsel and they were negotiating for what they wanted like annual elections and 10b5-1 [pre-planned stock sale] plans.

“And the mediator was thinking, you could see it in his eyes, we have experts negotiating with each other and it’s not just people trying to make money because a fraud happened.

“The investors are trying to make sure they are pushing the company to create long-term value.”

On that basis, it depends what kind of shareholder you are as to which kind of litigation is the best. If it is all about making money in the short-term, class actions are the way to go; if it is about long-term value, derivative suits are the best option.

The National Association of Realtors can’t dodge a suit accusing it of breaking antitrust laws by imposing sales commission rules that can result in unfair charges to home sellers, an Illinois federal court declared Friday.

The NAR had been trying to sway U.S. District Judge Andrea R. Wood to its position that the proposed class — composed of former homeowners who say they were duped into paying too high of a commission when they sold their houses — couldn’t prove it had been injured.

But the judge wasn’t convinced, saying that the injury laid out by the home sellers was “assuredly of a type that the Sherman Act was designed to prevent.”

“Each plaintiff was a home seller required to pay a commission to the buyer-broker for the person who purchased their home. But-for Defendants’ conspiracy, each plaintiff would have paid ‘substantially lower commissions,'” the court said.

That was enough to plead an antitrust injury, she said.

Judge Wood also wasn’t a fan of the association’s “perfunctory argument” that the home sellers couldn’t claim that NAR rules caused their injury because they never tried to negotiate a lower commission, since “that argument ignores plaintiffs’ allegations that the buyer-broker commission rules preclude any opportunity for effective negotiation.”

When homeowners want to sell their house, they contact a seller’s broker and list their home on what is known as a multiple listing service, or MLS. To list their home on the MLS, which makes the listing available to other agents but not home buyers, sellers are required to “make a blanket unilateral offer of compensation to any broker who finds a buyer for the home,” including brokers who represent the buyer.

The seller is the one who pays both sets of brokers, not the home buyer, and NAR rules prohibit sellers from negotiating the buyer-broker commission rate once that buyer-broker’s client has seen the home.

This makes negotiating the commission that a buyer’s broker gets “a practical impossibility,” according to Judge Wood.

The proposed class members claim that the NAR rules keep them locked into a single rate no matter what quality of service they receive and illegally inhibit competition. According to the plaintiffs, total commissions for U.S. residential real estate sales have remained between 5% and 5.4%, with 2.5% to 3% commissions going to buyer-brokers. Those rates are sufficiently higher than in comparable international markets to warrant the antitrust claims, the plaintiffs said.

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The proposed class is represented by Cohen Milstein Sellers & Toll PLLC, Susman Godfrey LLP and Hagens Berman Sobol Shapiro LLP

• Google’s recent $310 million settlement includes more than 80 updates or changes to its handling of sexual misconduct, discrimination and retaliation cases, the settlement filing shows.
• The company’s settlement terms target policy gaps that executives were allegedly able to exploit.
• The parties hoped the settlement would also act as a progressive bellwether for Silicon Valley, whose problematic handling of misconduct by executives surfaced amid the #MeToo movement.

Google parent company Alphabet has agreed to more than 80 updates or changes to its policies and procedures around sexual misconduct and harassment as part of an extensive legal settlement. The overhaul is meant to fill gaps that executives allegedly exploited to engage in sexual misconduct or harassment, and to serve as an example for other Silicon Valley tech companies.

The settlement, which includes $310 million devoted to new diversity, equality and inclusion measures, comes after a group of shareholders accused the leadership team of mishandling employee complaints of sexual misconduct and discrimination. If the settlement is approved by a judge, it will be the largest such commitment among tech companies, beating Intel’s $300 million diversity pledge it made in 2015.

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The filing shows structural gaps executives with power were allegedly able to exploit, as well as existing policies they allegedly bypassed.

“The excuse has always been that these were just a few bad apples,” said Julie Goldsmith Reiser, a lawyer for the plaintiffs, referring to Google’s defense and as well as the broader Silicon Valley. “This is the first time they’re saying in detail ‘it’s bigger than that and we aren’t going to allow this.’”

NDAs, arbitration and mandatory training

The parties wanted to use the settlement as an opportunity not only for Google to meet basic structural demands, but also to set a tone for the tech industry, which has been among the industries most plagued by transgressions and power differences during the #MeToo era, according to documents and conversations with the plaintiffs’ attorneys.

Over the last two years, Silicon Valley employees complaining of power differentials have spurred mass events and bad press for companies — the largest being the 2018 Google walkout, in which more than 20,000 Google employees walked out of offices worldwide to protest multimillion-dollar payouts to executives accused of sexual misconduct or harassment as they left the company.

One of the most significant terms in the settlement is limiting the use of nondisclosure agreements for Google employees, which had been a point of contention among employees in discrimination and harassment cases at Google and beyond.

Companies originally used NDAs to protect trade secrets, but they’ve gradually expanded to cover a blanket of topics, including workplace conditions, which critics say silences victims and enables perpetrators. Under the settlement terms, workers can now discuss facts of cases related to harassment or discrimination. In addition, employees can now bring someone with them when they report complaints as support and to bear witness to the conversations.

The company also agreed to make arbitration — a practice that prevents employees from taking cases to court and has been criticized for suppressing victims’ testimonies  — optional for all Alphabet workers, including contractors and employees at the company’s “Other Bets” divisions like Waymo self-driving cars. Following the 2018 walkout, the company said it would end forced arbitration, but the provision only applied to full employees at Google.

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HR policies were ignored or bypassed

While executives couldn’t be held responsible for nonexistent policies, the filings also expose the ways in which executives allegedly exploited gaps and bypassed some existing company policies. The litigation and internal leadership boards reviewed more than 1,600 internal documents that included board packages, communications, meeting agendas and minutes, and existing policies, the filings show.

“We found that Google’s human resources department actually had some capable, smart processes and people in place but the powerful people didn’t feel the need to adhere to HR,” Reiser said.

The Alphabet leadership team “improperly” approved large payments to executives including a $90 million severance package to Android co-founder Andy Rubin and $45 million to Amit Singhal after allegedly finding credible misconduct allegations, the filing states. Google agreed to require more layers of approval for actions related to executives involved in misconduct allegations, including creating oversight for the compensation committee, which approved Rubin’s and Singhal’s payouts, the filing said.

YouTube and Google parent Alphabet has committed $310 million over ten years to diversity and inclusion initiatives to settle a shareholder lawsuit stemming from allegations the company concealed payouts to top male executives accused of sexual harassment.

The deal disclosed Friday establishes a DEI (Diversity, Equity, Inclusion) Advisory Council of outside experts and Alphabet executives including CEO Sundar Pichai and includes reforms of workplace equity and board oversight.

The suit against Alphabet and certain officers and directors filed in California State Superior Court, alleged the tech giant violated its fiduciary duty by fostering a culture that let powerful executives sexually harass and discriminate against women. It was spurred by a news report in 2018 that Google gave Andy Rubin, the creator of Android mobile software, a $90 million exit package in 2014 even though he had been asked to resign. He had been accused of sexual misconduct in a case that Google investigated and found credible. There were similar stories for several other high-level executives.

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Reforms at the company include ending mandatory arbitration in harassment, discrimination and retaliation-related disputes; limiting the use of non-disclosure agreements; and recommending consistent, corrective action across business units.

Alphabet will expand the board’s Audit and Compliance role, requiring quarterly reports. And it will prevent employees with certain stock purchase plans from amending them if they are being investigated or sued for sexual misconduct.

“The settlement fundamentally alters Alphabet’s workplace policies, including the use of one-sided non-disclosure agreements that silence victims and enable powerful harassers,” said Julie Goldsmith Reiser, partner at Cohen Milstein Sellers & Toll, one of four firms leading the settlement negotiations on behalf of the plaintiffs.

NDA’s have been commonly used tools to stop women from speaking out and cited in cases from Harvey Weinstein to R. Kelly, Bill O’Reilly.

Cohen Milstein Sellers & Toll in Washington, D.C., and Bottini & Bottini helped negotiate the settlement.

Google parent company Alphabet has agreed to devote $310 million to diversity, equity and inclusion efforts as part of a settlement with shareholders after several executives in the company, including its former top lawyer, faced allegations of sexual misconduct or discrimination.

The deal, announced Friday, settles a stockholder derivative lawsuit filed in San Mateo County Superior Court in January 2019. Cohen Milstein Sellers & Toll in Washington, D.C., and Berman Tobacco in San Francisco represented plaintiffs in the suit who claimed Google fostered a “culture of concealment” that led to cover-ups of sexual harassment at the highest levels of the company.

The settlement put an end to Google’s policy of mandatory arbitration over harassment, discrimination and retaliation claims. It also limits the use of nondisclosure agreements so that the tech company’s employees can openly discuss the facts of an incident and the reporting process.

“The settlement fundamentally alters Alphabet’s workplace policies, including eliminating mandatory arbitration in harassment, discrimination and retaliation-related disputes and the use of one-sided nondisclosure agreements that silence victims and enable powerful harassers,” said Cohen Milstein’s Julie Goldsmith Reiser, one of four plaintiffs’ counsel appointed to lead the global settlement negotiations, in a statement. “These changes, along with the financial commitment to DEI initiatives, position Alphabet to lead as much in workplace equity as it is does [sic] in technology and innovation.”

Google parent company Alphabet Inc. has agreed to settle a shareholder lawsuit filed by two union pension funds that said the technology company breached its fiduciary duties in covering up a data breach and allegations of sexual harassment and discrimination.

The lawsuit was originally filed in January 2019 in a California Superior Court in San Jose by the Northern California Pipe Trades Pension Plan, Concord, Calif., and Teamsters Local 272 Labor Management Pension Fund, New York, alleging the company’s management “fostered a ‘brogrammer’ culture, where women are sexually harassed and valued less than their male counterparts,” the filing said.

The settlement agreement filed Friday includes policy reforms to improve board oversight and workplace equity; a diversity, equity and inclusion advisory council that includes Alphabet executives and outside experts; and a $310 million fund for other DEI initiatives over the next 10 years.

“The settlement fundamentally alters Alphabet’s workplace policies, including eliminating mandatory arbitration in harassment, discrimination and retaliation-related disputes and the use of one-sided non-disclosure agreements that silence victims and enable powerful harassers,” said Julie Goldsmith Reiser, partner at plaintiffs’ attorney Cohen Milstein Sellers & Toll, in a news release announcing the settlement. “These changes, along with the financial commitment to DEI initiatives, position Alphabet to lead as much in workplace equity as it is does in technology and innovation.”

Google parent Alphabet Inc. has agreed to spend $310 million on diversity and inclusion initiatives to settle California litigation alleging the company misled investors by covering up sexual harassment and abuse by executives, the shareholders’ attorneys said Friday.

The company has also agreed to “sweeping policy reforms” that include ending the use of forced arbitration of harassment, discrimination and retaliation-related employment disputes, narrowing confidentiality agreements so workers can discuss the facts of their case, and ensuring workers companywide are punished equally for the same misconduct, plaintiffs firm Cohen Milstein Sellers & Toll PLLC said.

“The settlement fundamentally alters Alphabet’s workplace policies,” Cohen Milstein attorney Julie Goldsmith Reiser said. “These changes, along with the financial commitment to [diversity, equity and inclusion] initiatives, position Alphabet to lead as much in workplace equity as it does in technology and innovation.”

The deal, which the parties signed last month and submitted Friday to Santa Clara Superior Court, would if approved end a series of linked lawsuits accusing Alphabet executives of breaching their fiduciary duty to investors by covering up misconduct.

The Northern California Pipe Trades Pension Plan’s January 2019 complaint alleges Alphabet’s board engaged in a “pattern of concealment” to protect company interests at investors’ expense, including by hiding sexual misconduct and having lax customer data safeguards. The complaint points to $135 million in combined severance payouts to former executives Andy Rubin and Amit Singhal who left the company following credible sexual harassment allegations. The suit was consolidated in California state court with several similar suits in May 2019.

Under the settlement, Alphabet will allocate $310 million over up to 10 years to fund various initiatives meant to diversify its workforce from top to bottom. The company has agreed to improve tech education among historically underrepresented groups by investing in computer science programs; to hire, promote and retain underrepresented talent; to foster a respectful and equitable workplace culture; and to help underrepresented groups succeed in tech by supporting events and increasing access to opportunities.

The deal also sets out an anti-sexual harassment program that includes a commitment from company officials to foster a respectful working environment, empathy for workers who come forward, transparency about the frequency of harassment complaints, fairness toward involved parties and accountability. Alphabet must incorporate these principles into formal policies and convene a panel known as the diversity, equity and inclusion advisory council to oversee its efforts for at least five years. Regarding the privacy-related allegations, Alphabet has agreed to more closely monitor data breaches.

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The shareholders are represented by Julie Goldsmith Reiser and Molly Bowen of Cohen Milstein Sellers & Toll PLLC and Francis Bottini, Albert Chang, Anne Beste and Yury Kolesnikov of Bottini & Bottini Inc.

Alphabet will commit $310 million to corporate diversity initiatives.

Google parent company Alphabet has settled a shareholder lawsuit over the company’s handling of sexual misconduct allegations.

As part of the settlement, announced Friday, Alphabet will commit $310 million to corporate diversity initiatives, as well as form an advisory board dedicated to diversity and equality issues. The board will include CEO Sundar Pichai as well as outside experts.

“The settlement fundamentally alters Alphabet’s workplace policies,” said Julie Goldsmith Reiser, a partner at Cohen Milstein Sellers & Toll, one of the firms representing Alphabet shareholders. “These changes, along with the financial commitment to DEI initiatives, position Alphabet to lead as much in workplace equity as it is does in technology and innovation.”

The lawsuit stemmed from sexual misconduct allegations reported two years ago against Andy Rubin, creator of Google’s Android mobile operating system. In the face of those allegations, Alphabet’s board reportedly granted Rubin a $90 million exit package. The claims sent off shockwaves inside Google, leading to a historic walkout in which more than 20,000 employees around the world marched out of their offices in protest.

Alphabet is also making changes to its arbitration policies, a subject of focus for activists inside Google when they organized the walkout. Last year, Google ended forced arbitration for employment disputes. Now Alphabet is removing arbitration requirements for the parts of the company outside of Google, or “other bets” including its self-driving-car division Waymo or health sciences arm Verily. Google will also be more limited in its use of nondisclosure agreements.

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In addition to Pichai, Google executives on the new diversity council will include Chief Legal Officer Kent Walker, Chief Diversity Officer Melonie Parker, and Senior Vice President Jen Fitzpatrick. Outside members will include Nancy Gertner, a Harvard Law School lecturer and retired federal judge, and Fred Alvarez, a former member of the Equal Employment Opportunity Commission.

Google’s parent company was hit with a wave of lawsuits after The New York Times reported that an accused executive had received a $90 million exit package.

Google’s parent company, Alphabet, has settled a series of shareholder lawsuits over its handling of sexual harassment claims, agreeing to greater oversight by its board of directors in future cases of sexual misconduct and committing to spend $310 million over the next decade on corporate diversity programs.

The settlement, filed on Friday in California Superior Court, also said employees would no longer be forced to settle disputes with Alphabet in private arbitration. Workers had demanded that change after details of sexual harassment cases at the company became public two years ago.

In addition, Alphabet said it would limit confidentiality restrictions when settling harassment and discrimination cases and ban workplace romances between managers and subordinates.

The Silicon Valley company was hit by a wave of shareholder lawsuits after The New York Times reported in 2018 that the board of directors had approved a $90 million exit package for a star executive, Andy Rubin, even after an investigation deemed a sexual harassment claim against him credible.

Five lawsuits in California were eventually consolidated into one case. One of them, brought by James Martin, an Alphabet shareholder, said board members had allowed illegal conduct to proliferate, ignored their fiduciary duties and became enablers of sexual harassment and discrimination.

. . .

Julie Goldsmith Reiser, a partner at Cohen Milstein Sellers & Toll, one of the firms representing Alphabet shareholders, said the $310 million commitment was meaningful because the tech giant was paying the money directly and it was earmarked to address one of the root problems at the company.

“The settlement fundamentally alters Alphabet’s workplace policies,” Ms. Reiser said. “It feels like we’ve given the company the tools to become a better workplace.”

So-called shareholder derivative lawsuits have sprung up in the wake of “Me Too” revelations of sexual misconduct by executives or prominent employees as a way to try to hold companies accountable.

In similar lawsuits at 21st Century Fox and Wynn Resorts, the damages won by shareholders were paid out by insurers to the companies, instead of to the individuals who sued.

. . .

The settlement with Alphabet also does not direct money to the people who sued, but it does steer funding and policies to prevent the bad behavior from recurring. Ms. Reiser hailed it for setting a new level of corporate governance and accountability, as well as a standard for the rest of the technology industry. The level of board involvement and executive accountability, she said, “goes far beyond what we’ve seen in other settlements.”

As the lawsuits started piling up, Alphabet’s board created a committee of independent directors to investigate the claims, interviewing current and former directors and employees. After the review, the committee determined that it should try to resolve the claims, according to the settlement. Alphabet and its directors denied any wrongdoing in the document laying out the agreement.

. . .

As part of the settlement, Alphabet agreed to form an advisory council focused on diversity, equality and inclusion made up of four executives — including Sundar Pichai, the chief executive — and three outside experts including Nancy Gertner, a retired federal judge. The group will take on a wide range of issues, including hiring and retention, compensation, and how the company responds to and investigates employee complaints.

In addition, Alphabet’s board will receive more information about how the company is handling claims of sexual harassment, discrimination and retaliation, and directors will receive regular reports on the compensation of any senior executives found to have engaged in serious misconduct.

Shortly after the report about the payouts to Mr. Rubin and other Google executives accused of sexual misconduct, 20,000 workers staged a walkout demanding changes to how the company treats employees. In response, Google agreed to stop forced arbitration in individual cases of sexual harassment or assault. It later expanded the policy to all employee disputes with the company.

Alphabet said it would now extend the policy to its 11 other subsidiaries, like the self-driving car company Waymo. Some of those businesses have thousands of employees.

Google employees will no longer be bound to nondisclosure agreements preventing them from discussing the underlying facts or circumstances of incidents when settling sexual harassment and retaliation claims. Alphabet said it would “encourage” its subsidiaries to do the same but was not requiring the change.

In an attempt to address past problems of executives dating subordinates, Alphabet said, it has changed its workplace romance policy so that managers are no longer allowed to date employees they supervise. The previous policy “strongly discouraged” such relationships.

Alphabet also agreed that employees who are being investigated over claims of sexual misconduct, sexual harassment or retaliation when they depart Google will not receive severance or other compensation. That is already the case for employees fired for misconduct. Under the new policy, even if an employee is not fired, the misconduct will be taken into account in determining his or her severance, the company said

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Google’s parent company, Alphabet, agreed to spend $310 million over the next 10 years on diversity programs and hand over greater oversight to its board of directors on sexual misconduct claims in settling a series of shareholder lawsuits Friday.

The settlement, filed in California Superior Court, prohibits Alphabet’s use of private arbitrators to settle those and other disputes. That was one of the changes employees wanted when some of the sexual harassment cases against the company became public.

Cohen Milstein Sellers & Toll, one of the firms representing Alphabet shareholders, said in a statement the company also agreed to limit its use of non-disclosure agreements, and address corrective action recommendations across business units to ensure consistent consequences for the same misconduct.

“The settlement fundamentally alters Alphabet’s workplace policies, including eliminating mandatory arbitration in harassment, discrimination and retaliation-related disputes and the use of one-sided disclosure agreements that silence victims and enable powerful harassers,” shareholder attorney Julie Goldsmith Reiser said in a statement.

“These changes, along with the financial commitment to [diversity, equity and inclusion] initiatives, position Alphabet to lead as much in workplace equity as it is done in technology and innovation,” Goldsmith Reiser said.

. . .

“The Alphabet settlement also institutes governance measures to ensure that Alphabet’s board is informed of and accountable for overseeing risks arising from sexual harassment by executives and, more broadly, fostering a diverse, equitable and inclusive culture,” the law firm said.