When you’re in business for yourself, or you’re an officer or director in a company, you already know that disagreements can turn into lawsuits quickly and that the cost of these suits can be astronomical — even if you win.
Two of the most common types of court cases stemming from business ownership are employment practices liability (EPL) suits and directors and officers (D&O) claims. Unfortunately, these types of cases are on the rise, and it’s not only big corporations that have to defend themselves. Small and medium-sized, privately-held companies can be subject to many of the same employment laws as the conglomerates, and your company doesn’t have to be listed on a stock exchange for its directors and officers to get sued.
That’s why companies invest in EPL and D&O insurance to protect themselves when and if these lawsuits happen.
Is your company at risk of being sued? Take a look at some real-world EPL and D&O suits. Some are enormous international companies, and some are small businesses. It doesn’t matter how large or small your company is. As these companies discovered, a lawsuit can be expensive.
It’s likely that you read or hear about an EPL suit every day. Employment practice liability includes the employment laws covered by the Equal Employment Opportunity Commission (EEOC) on a federal level and various local enforcement agencies, who may have stricter laws than the EEOC, and consists of all forms of employment discrimination. While some laws only apply to larger employers, you’ll see that there are exposures for all size businesses.
For example, take the case of an African-American employee at a Smashburger restaurant in Long Island, New York. An employee of a Smashburger alleged a hostile work environment caused by his manager. The manager used racial slurs to refer to him and continued the racially charged comments to the employee’s fiancée. The employee spoke to his district manager (DM) about this unlawful conduct, but the DM failed to take the complaint seriously. The DM’s response was to transfer the employee involuntarily to a different location — further from his home. That’s when the employee reported the company to the US EEOC, who sued Icon Burger Acquisition, LLC, Smashburger’s then-parent company, which was located in Colorado.
The case went to trial for violation of Title VII of the Civil Rights Act of 1964, which protects workers from harassment based on race. Icon was found liable and paid damages of $70,000 to the employee for emotional distress. The court also ordered Icon to make revisions to Smashburger’s nationwide antidiscrimination policies and create nationwide policies for the investigation of discrimination and retaliation complaints.
It’s not uncommon for companies to undergo Reductions in Force (RIFs) during times of economic uncertainty. Almost everyone experiences a layoff at some point in their career. However, the shoe chain DSW conducted a RIF that only affected workers older than 40 and retaliated against other employees who opposed the corporate office order to discriminate against the older workers targeted for layoff. That’s when the EEOC stepped in. The agency brought a lawsuit under the Age Discrimination in Employment Act of 1967 (ADEA), which prohibits employment age discrimination.
Less than a week after the EEOC introduced the suit, DSW offered to settle rather than undergo the expense of a trial. The company agreed to pay the employees against whom they discriminated $900,000 and must conduct employee training about age discrimination prevention.
EEOC District Director John Rowe, who managed the investigation and charges said: “Age discrimination is a real problem in employment today. Too many employers fail to see the value of the experienced portion of their workforce. But when an employer charged with such discrimination works with the EEOC to fix the problem, everyone wins.”
It’s surprising that many privately-held companies, both commercial and not-for-profit, don’t realize that their leaders can be held personally responsible for the decisions they make. Not only that, but directors and officers can be held liable for illegal conduct even if they do not know about the crime. Take a look at the following two cases.
If found guilty, Argos and its directors and officers could have faced a penalty of up to $100 million. Ultimately, Argos admitted to participating in the conspiracy and agreed to pay a $20 million criminal penalty.
“The illegal conduct was limited to a small number of employees who joined the company through an asset acquisition of another company in October 2011, after the conspiracy had already begun,” U.S. attorneys affirmed. “These employees worked in a local sales office in Pooler (Georiga), which was responsible for approximately 1% of the company’s annual revenues and employed less than 1% of the workforce. Management outside the office in Pooler did not participate in or condone the conduct.”
Situations like this can come as a shock to companies’ directors and officers. You can protect directors’ and officers’ personal assets if your company invests in D&O insurance, which covers legal fees, court costs, and fines.
By now, most people are familiar with the dangers of “vaping,” or the use of electronic cigarettes that emit water vapor instead of smoke. One of the vaping industry leaders is Juul, which sells both the devices and the liquid cartridges people fill the devices with.
In December 2018, things were looking great for Juul’s future. The tobacco and cigarette company Altria invested almost $13 billion in Juul, and Altria, in turn, was about to be acquired by the biggest tobacco company of them all, Phillip Morris.
There was just one problem. In April 2019, The Food and Drug Administration (FDA) investigated Juul because of allegations that some people became ill and had seizures after vaping. Further, even though Juul claimed that its products were meant as a safe and healthier way to help smokers quit smoking, e-cigarettes were becoming especially popular with teens and children, and, like cigarettes, contain nicotine. Juul even offered candy- and fruit-flavored cartridges. Due to concerns about widespread youth nicotine addiction, San Francisco banned Juul and all e-cigarettes in July.
By September of the same year, Phillip Morris decided not to pursue its merger with Altria. The same month, the FDA blasted Juul for its health and safety claims, and Altria’s $12.8 billion investment in Juul became devalued along with Juul.
Where did all this leave Juul, a privately-held company? In January 2020, one of Juul’s shareholders filed a D&O suit accusing six of its current board members and several other directors and officers of “substantial wrongdoing, mismanagement, and breaches of fiduciary duty that resulted in an enormous decrease in the valuation of the company…” and that Juul’s directors and officers “…breached their fiduciary duties…by failing to provide financial information, annual reports, and other basic information to the shareholders…thus inhibiting the ability to discover the true worth of their stock.”
In many cases like this, the legal fees can far exceed the settlement or judgment amount. Even if your company is small and privately owned, when the company leaders’ personal assets are at stake for the decisions they make as part of their jobs, it’s a good idea to take a serious look at insurance.
Because the need for D&O and EPL coverage is skyrocketing we recently released our 2022 Executive Risks Report, which outlines the current risk of D&O and EPL claims, as well as the demand that executives have for this liability coverage.
Patrick Mitchell is executive risks lead at Coalition, Inc.
This piece originally appeared on the Coalition blog and is reprinted here with permission.
Opinions expressed are the author’s own.
