Senior Executive and Officer Litigation

Second, plaintiffs increasingly have been asserting various common law tort claims (i.e., defamation, tortious interference, and intentional infliction of emotional distress). These tort claims, unlike many employment laws, do not limit who can be sued, and thus allow plaintiffs to bring claims against corporate executives and directors in their individual capacity. See, e.g., Haugh v. Schroder Investment Management N. Am. Inc., 2003 WL 21136096 (S.D. N.Y. 2003) (allowing the plaintiff to file defamation lawsuit against the CEO but not against the company); Boyle v. Boston Found., Inc., 788 F. Supp. 627 (D. Mass. 1992) (refusing to dismiss employee's claim against President and CEO for interference with contractual relations). Moreover, plaintiffs realize that tort claims are not subject to the caps or limitations on damages that apply under many employment laws.

Third, both state and federal laws, including the Sarbanes-Oxley Act of 2002 (SOX), have been enacted to encourage and strongly protect reporting of accounting, internal control issues, and auditing irregularities. Companies have rushed to comply with these laws by establishing committees and procedures to review business practices and to enable employees to submit, confidentially and anonymously, concerns regarding the company's accounting, internal controls, or auditing matters. Companies sometimes do not comply with their own new procedures, and this added layer of policy and procedure thus has further exposed them and their senior staffs to liability.

Corporate Liability for an Executive's Conduct

Whether or not a corporate official is sued personally, the company frequently will be sued for the acts of its executives and directors. For example, one company settled a lawsuit with the EEOC in which it was alleged that the company's president and CEO refused to promote an African-American to the position of account manager. See 'Concrete Firm Settles Race Bias Case,' Houston Chron., Mar. 4, 2004, at 2. The company's president/CEO believed that customers would not accept the employee as an account manager because the region where the employee would have worked was, according to the president/CEO, 'redneck country.' Id.

Likewise, an investment adviser for trust and retirement funds sued Maytag for comments made by Maytag's former chairman and CEO Ralph Hake and former CFO George Moore. The adviser claimed that Hake and Moore allegedly deceived the public about Maytag's business outlook during public comments made at an investor's conference and other events in order to boost the purchase price of the company because they were trying to sell Maytag and they both owned thousands of shares of Maytag stock. Although the lawsuit ultimately was dismissed, the dismissal followed a year of litigation and publicity. See 'Judge Dismisses Lawsuit Against Former Maytag CEO Ralph Hake, Others,' Associated Press, July 11, 2006.

Even when an executive or director is not the direct cause of the lawsuit, his or her statements or conduct may be admissible as evidence against the corporation if a lawsuit is filed. See, e.g., Pastran v. K-Mart Corp., 210 F.3d 1201 (10th Cir. 2000) (managerial statements can be admissible as vicarious admissions of the company); Lee v. Curt Mfg. Inc., No. 03-C-523-C (W.D. Wisc. June 24, 2004) (although not linked to the termination decision, comments and attitudes of the CEO, which showed that he had 'little respect for women in the workplace,' could be used to support gender discrimination claim.).

Executives and directors maintain a high level of visibility and are deemed the living and breathing embodiment of the company and, therefore, their conduct constantly is being monitored and must conform to the highest standards of conduct to avoid potential liability. See Sarsha v. Sears, Roebuck & Co., 3 F.3d 1035 (7th Cir. 1993) (concluding that supervisors could be held to higher standards of conduct because supervisors, 'by virtue of their managerial positions[,] are expected to know better than subordinates'). When this conduct falls short, even if for purely personal gain, companies face exposure to a lawsuit.

Steps to Reduce the Executive's Risk

Apply the same standard across the board. Given that a corporation's culture begins at the top, it is imperative that executives and directors set the proper tone for others. Accordingly, they should abide by, and be held to, the same standards regarding appropriate conduct as employees of the corporation.

In turn, executives and directors who are aware of potentially improper behavior by others at their level should not sweep such behavior under the rug. Problems must be addressed and resolved before claims are made. By applying and vigorously enforcing standards at all levels of the corporate structure, a company can limit any potential judgment through its good-faith efforts to enforce company policy and comply with the law. Likewise, the executive or director will limit his or her potential liability by acting in good faith and in the best interests of the company when made aware of potential wrongdoing.

Indeed, in the employment context, the U.S. Supreme Court has determined that an employer may not be vicariously liable for punitive damages based on 'the discriminatory employment decisions of managerial agents where these decisions are contrary to the employer's good-faith efforts to comply with Title VII.' See Kolstad v. American Dental Ass'n, 527 U.S. 526, 544-45 (1999). Accordingly, a company that promulgates and then enforces its policies equally may find protection under the law should any misconduct become the subsequent basis for a lawsuit.

Require training for upper-level employees. Much of company training is geared to lower-level personnel and relates to diversity issues. Companies must ensure that all levels of upper management participate in such training. Upper-level training ensures that company policies are understood and evenly enforced. Training of upper management also teaches corporate officials how to monitor their own behavior by understanding the impact of their behavior on the entire organization.

In response to recent laws such as SOX, companies have established committees and procedures to review business practices and to enable employees to submit concerns regarding corporate accounting, internal control, or auditing matters confidentially and anonymously. All corporate employees must receive training on these new procedures so that employees understand the policies they must follow and how to report a potential violation of an internal control. Senior executives also need this training in particular to understand how these new controls and procedures affect their job responsibilities and corporate obligations.

Limit executives' exposure to issues. Executives and directors must be aware that everything they send or receive and everything that is said or written during the normal course of business may be discoverable and admissible in evidence in the event of litigation. Indeed, statements made by high-level executives often are deemed binding admissions of a corporation. See, e.g., Haynes v. W.C. Cave & Co., 52 F.3d 928 (11th Cir. 1995) (holding that a male company president's comments that women were not tough enough to hold a collections position and that it would take a man to do the job could be considered direct evidence of discriminatory intent and admissions of the corporation).

Ensure accuracy in e-mails. E-mail is a powerful tool to communicate with coworkers, customers, and vendors. At the same time, the spontaneous nature of e-mail (as well as the easy ability to circulate a message to a number of people) often leads to the distribution of messages without sufficient attention to the content of the message. Courts and juries (and for that matter plaintiffs' attorneys) see e-mail as no different from a letter, a fax, or a memorandum. For this reason, executives and directors always should strive to ensure that what they say and write is accurate and precise. Further, especially in light of the new federal discovery rules that will require enhanced retention and production of e-mails, executives and officers must pay particular attention to what they say and write.

Limit copying of non-essential corporate personnel. Increasingly, plaintiffs are using depositions as a form of harassment by requiring CEOs, executives, and directors to testify in lawsuits about which they have little or no real personal knowledge. Plaintiffs justify these depositions by presenting documents to the court showing that the executive or director received a copy of relevant documents and argue that the recipients may have information relating to the claims and defenses at issue. Courts may require plaintiffs to provide 'some showing beyond mere relevance, such as evidence that a high-level executive is the only person with personal knowledge of the information sought or that the executive arguably possesses relevant knowledge greater in quality or quantity than other available sources.' Mulvey v. Chrysler Corp., 106 F.R.D. 364, 366 (D. R.I. 1985); Salter v. Upjohn Co., 593 F.2d 649 (5th Cir. 1979) (affirming order vacating notice of deposition until it was shown that testimony of other employees was insufficient).

Nevertheless, it often takes a costly battle in court to obtain any protection. In the course of that battle, sensitive facts may have to be put in the public record. A far more effective way for businesses to safeguard against such depositions is by ensuring that executives and directors receive only documents that they have a particular need to review. Overly broad access to information serves only to pull executives and directors into the loop should litigation result.

Responding to Claims Against Executives and Directors

Prompt, Remedial Investigation

Most companies are well aware that they must have a complaint and investigation procedure in place, and that they must investigate internal complaints in a prompt and effective fashion in order to be able to invoke the Faragher and Ellerth affirmative defense. Faragher v. City of Boca Raton, 524 U.S. 775 (1998), and Burlington Indus., Inc. v. Ellerth, 524 U.S. 742 (1998). Companies must ensure, however, that such complaint procedures apply with equal force to executives and directors.

Who Should Control and Perform the Internal Investigation?

Determining who should control and perform an internal investigation can be a difficult issue when claims have been leveled against a CEO or other high-ranking officer. Sometimes it is difficult for a human resources manager or other employee to conduct an investigation of a higher-ranking official. Moreover, some complainants may perceive such internal investigations as potentially unfair and vulnerable to undue influence. Corporations thus may wish to consider using outside counsel, an independent professional investigator, or a committee of directors in such a situation.

If an outside or in-house lawyer is chosen to conduct the investigation, the lawyer must be sure that the executive or other target of the investigation knows that the lawyer represents the corporation and is gathering information to advise the corporation. It is important that the executive not mistakenly believe that the lawyer represents him or her personally during the internal phase of the investigation. Otherwise, the official may believe that a statement that 'you cannot tell anyone else' or an admission of other possible wrongdoing will not be reported.

Confidentiality/Privilege Issues

At the outset of the investigation, the corporation should determine whether or not it wishes the information obtained during the investigation to be protected from disclosure by the attorney-client privilege. There are benefits and costs to either approach. Moreover, special procedures must be followed for the privilege to apply. In light of the U.S. Supreme Court's decisions in Faragher and Ellerth, however, disclosure of an investigation report may be best for the company in order to utilize the Faragher/Ellerth affirmative defense.

Who Should Be Informed of the Investigation and Its Results?

The answer to this question will depend on who is the subject of the investigation. If a president or CEO is being investigated, then the chairperson of the board of directors will have to be informed because board action may be required. It is important to inform only those with a clear 'need to know' to protect the confidentiality of those involved and to avoid defamation claims.

Conclusion

Lawsuits against executives can be embarrassing and costly. However, through training, enforcement of policies, and clear guidelines concerning what information is to be said, written, sent, or received by a company official, companies can limit exposure to lawsuits brought against corporate officials.

Gil A. Abramson, a member of this newsletter's Board of Editors, is a partner in Hogan & Hartson's Baltimore office. Sarah Dean is an associate in the Northern Virginia office. This article appeared in a different form as part of the course materials for Hogan & Hartson's 2006 Labor & Employment Law Seminar in November 2006, authored by Paul Skelly and Jonathan Rees, partners in the Washington office, and Brian Lerner, an associate in the Miami office.

In the old days, decisions made by executives and directors in the board room often were cloaked with a veil of legitimacy. Now, however, these decisions are under constant surveillance and scrutiny from outsiders and are even vulnerable to leaks from insiders. As executives and directors are thrust into the media and legal forefront, not only do they face potential personal liability for their decisions, but the corporations themselves face liability for their actions.

Personal Liability of Executives and Directors

Spurred in part by recent corporate scandals, the number of lawsuits against corporate officers and directors has increased dramatically. There are a number of reasons for this rapid growth. First, laws in a number of states, including the District of Columbia and Maryland, allow corporate officials to be sued in their individual capacity. See, e.g. , Anyan v. New York Life Ins. Co. , 192 F. Supp. 2d 229 (S.D. N.Y. 2002) (New York law) ; Palladino ex rel. U.S. v. VNA of Southern New Jersey, Inc ., 68 F. Supp. 2d 455, 474 (D. N.J. 1999); Wallace v. Skadden, Arps, Slate, Meagher & Flom , 715 A.2d 873, 889 (D.C. 1998) (D.C. law).

Second, plaintiffs increasingly have been asserting various common law tort claims (i.e., defamation, tortious interference, and intentional infliction of emotional distress). These tort claims, unlike many employment laws, do not limit who can be sued, and thus allow plaintiffs to bring claims against corporate executives and directors in their individual capacity. See, e.g., Haugh v. Schroder Investment Management N. Am. Inc., 2003 WL 21136096 (S.D. N.Y. 2003) (allowing the plaintiff to file defamation lawsuit against the CEO but not against the company); Boyle v. Boston Found., Inc ., 788 F. Supp. 627 (D. Mass. 1992) (refusing to dismiss employee's claim against President and CEO for interference with contractual relations). Moreover, plaintiffs realize that tort claims are not subject to the caps or limitations on damages that apply under many employment laws.

Third, both state and federal laws, including the Sarbanes-Oxley Act of 2002 (SOX), have been enacted to encourage and strongly protect reporting of accounting, internal control issues, and auditing irregularities. Companies have rushed to comply with these laws by establishing committees and procedures to review business practices and to enable employees to submit, confidentially and anonymously, concerns regarding the company's accounting, internal controls, or auditing matters. Companies sometimes do not comply with their own new procedures, and this added layer of policy and procedure thus has further exposed them and their senior staffs to liability.

Corporate Liability for an Executive's Conduct

Whether or not a corporate official is sued personally, the company frequently will be sued for the acts of its executives and directors. For example, one company settled a lawsuit with the EEOC in which it was alleged that the company's president and CEO refused to promote an African-American to the position of account manager. See 'Concrete Firm Settles Race Bias Case,' Houston Chron., Mar. 4, 2004, at 2. The company's president/CEO believed that customers would not accept the employee as an account manager because the region where the employee would have worked was, according to the president/CEO, 'redneck country.' Id.

Likewise, an investment adviser for trust and retirement funds sued Maytag for comments made by Maytag's former chairman and CEO Ralph Hake and former CFO George Moore. The adviser claimed that Hake and Moore allegedly deceived the public about Maytag's business outlook during public comments made at an investor's conference and other events in order to boost the purchase price of the company because they were trying to sell Maytag and they both owned thousands of shares of Maytag stock. Although the lawsuit ultimately was dismissed, the dismissal followed a year of litigation and publicity. See 'Judge Dismisses Lawsuit Against Former Maytag CEO Ralph Hake, Others,' Associated Press, July 11, 2006.

Even when an executive or director is not the direct cause of the lawsuit, his or her statements or conduct may be admissible as evidence against the corporation if a lawsuit is filed. See, e.g. , Pastran v. K-Mart Corp ., 210 F.3d 1201 (10th Cir. 2000) (managerial statements can be admissible as vicarious admissions of the company); Lee v. Curt Mfg. Inc., No. 03-C-523-C (W.D. Wisc. June 24, 2004) (although not linked to the termination decision, comments and attitudes of the CEO, which showed that he had 'little respect for women in the workplace,' could be used to support gender discrimination claim.).

Executives and directors maintain a high level of visibility and are deemed the living and breathing embodiment of the company and, therefore, their conduct constantly is being monitored and must conform to the highest standards of conduct to avoid potential liability. See Sarsha v. Sears, Roebuck & Co. , 3 F.3d 1035 (7th Cir. 1993) (concluding that supervisors could be held to higher standards of conduct because supervisors, 'by virtue of their managerial positions[,] are expected to know better than subordinates'). When this conduct falls short, even if for purely personal gain, companies face exposure to a lawsuit.

Steps to Reduce the Executive's Risk

Apply the same standard across the board. Given that a corporation's culture begins at the top, it is imperative that executives and directors set the proper tone for others. Accordingly, they should abide by, and be held to, the same standards regarding appropriate conduct as employees of the corporation.

In turn, executives and directors who are aware of potentially improper behavior by others at their level should not sweep such behavior under the rug. Problems must be addressed and resolved before claims are made. By applying and vigorously enforcing standards at all levels of the corporate structure, a company can limit any potential judgment through its good-faith efforts to enforce company policy and comply with the law. Likewise, the executive or director will limit his or her potential liability by acting in good faith and in the best interests of the company when made aware of potential wrongdoing.

Indeed, in the employment context, the U.S. Supreme Court has determined that an employer may not be vicariously liable for punitive damages based on 'the discriminatory employment decisions of managerial agents where these decisions are contrary to the employer's good-faith efforts to comply with Title VII.' See Kolstad v. American Dental Ass'n , 527 U.S. 526, 544-45 (1999). Accordingly, a company that promulgates and then enforces its policies equally may find protection under the law should any misconduct become the subsequent basis for a lawsuit.

Require training for upper-level employees. Much of company training is geared to lower-level personnel and relates to diversity issues. Companies must ensure that all levels of upper management participate in such training. Upper-level training ensures that company policies are understood and evenly enforced. Training of upper management also teaches corporate officials how to monitor their own behavior by understanding the impact of their behavior on the entire organization.

In response to recent laws such as SOX, companies have established committees and procedures to review business practices and to enable employees to submit concerns regarding corporate accounting, internal control, or auditing matters confidentially and anonymously. All corporate employees must receive training on these new procedures so that employees understand the policies they must follow and how to report a potential violation of an internal control. Senior executives also need this training in particular to understand how these new controls and procedures affect their job responsibilities and corporate obligations.

Limit executives' exposure to issues. Executives and directors must be aware that everything they send or receive and everything that is said or written during the normal course of business may be discoverable and admissible in evidence in the event of litigation. Indeed, statements made by high-level executives often are deemed binding admissions of a corporation. See, e.g., Haynes v. W.C. Cave & Co. , 52 F.3d 928 (11th Cir. 1995) (holding that a male company president's comments that women were not tough enough to hold a collections position and that it would take a man to do the job could be considered direct evidence of discriminatory intent and admissions of the corporation).

Ensure accuracy in e-mails. E-mail is a powerful tool to communicate with coworkers, customers, and vendors. At the same time, the spontaneous nature of e-mail (as well as the easy ability to circulate a message to a number of people) often leads to the distribution of messages without sufficient attention to the content of the message. Courts and juries (and for that matter plaintiffs' attorneys) see e-mail as no different from a letter, a fax, or a memorandum. For this reason, executives and directors always should strive to ensure that what they say and write is accurate and precise. Further, especially in light of the new federal discovery rules that will require enhanced retention and production of e-mails, executives and officers must pay particular attention to what they say and write.

Limit copying of non-essential corporate personnel. Increasingly, plaintiffs are using depositions as a form of harassment by requiring CEOs, executives, and directors to testify in lawsuits about which they have little or no real personal knowledge. Plaintiffs justify these depositions by presenting documents to the court showing that the executive or director received a copy of relevant documents and argue that the recipients may have information relating to the claims and defenses at issue. Courts may require plaintiffs to provide 'some showing beyond mere relevance, such as evidence that a high-level executive is the only person with personal knowledge of the information sought or that the executive arguably possesses relevant knowledge greater in quality or quantity than other available sources.' Mulvey v. Chrysler Corp ., 106 F.R.D. 364, 366 (D. R.I. 1985); Salter v. Upjohn Co. , 593 F.2d 649 (5th Cir. 1979) (affirming order vacating notice of deposition until it was shown that testimony of other employees was insufficient).

Nevertheless, it often takes a costly battle in court to obtain any protection. In the course of that battle, sensitive facts may have to be put in the public record. A far more effective way for businesses to safeguard against such depositions is by ensuring that executives and directors receive only documents that they have a particular need to review. Overly broad access to information serves only to pull executives and directors into the loop should litigation result.

Responding to Claims Against Executives and Directors

Prompt, Remedial Investigation

Most companies are well aware that they must have a complaint and investigation procedure in place, and that they must investigate internal complaints in a prompt and effective fashion in order to be able to invoke the Faragher and Ellerth affirmative defense. Faragher v. City of Boca Raton, 524 U.S. 775 (1998), and Burlington Indus., Inc. v. Ellerth , 524 U.S. 742 (1998). Companies must ensure, however, that such complaint procedures apply with equal force to executives and directors.

Who Should Control and Perform the Internal Investigation?

Determining who should control and perform an internal investigation can be a difficult issue when claims have been leveled against a CEO or other high-ranking officer. Sometimes it is difficult for a human resources manager or other employee to conduct an investigation of a higher-ranking official. Moreover, some complainants may perceive such internal investigations as potentially unfair and vulnerable to undue influence. Corporations thus may wish to consider using outside counsel, an independent professional investigator, or a committee of directors in such a situation.

If an outside or in-house lawyer is chosen to conduct the investigation, the lawyer must be sure that the executive or other target of the investigation knows that the lawyer represents the corporation and is gathering information to advise the corporation. It is important that the executive not mistakenly believe that the lawyer represents him or her personally during the internal phase of the investigation. Otherwise, the official may believe that a statement that 'you cannot tell anyone else' or an admission of other possible wrongdoing will not be reported.

Confidentiality/Privilege Issues

At the outset of the investigation, the corporation should determine whether or not it wishes the information obtained during the investigation to be protected from disclosure by the attorney-client privilege. There are benefits and costs to either approach. Moreover, special procedures must be followed for the privilege to apply. In light of the U.S. Supreme Court's decisions in Faragher and Ellerth, however, disclosure of an investigation report may be best for the company in order to utilize the Faragher/Ellerth affirmative defense.

Who Should Be Informed of the Investigation and Its Results?

The answer to this question will depend on who is the subject of the investigation. If a president or CEO is being investigated, then the chairperson of the board of directors will have to be informed because board action may be required. It is important to inform only those with a clear 'need to know' to protect the confidentiality of those involved and to avoid defamation claims.

Conclusion

Lawsuits against executives can be embarrassing and costly. However, through training, enforcement of policies, and clear guidelines concerning what information is to be said, written, sent, or received by a company official, companies can limit exposure to lawsuits brought against corporate officials.

Gil A. Abramson, a member of this newsletter's Board of Editors, is a partner in Hogan & Hartson's Baltimore office. Sarah Dean is an associate in the Northern Virginia office. This article appeared in a different form as part of the course materials for Hogan & Hartson's 2006 Labor & Employment Law Seminar in November 2006, authored by Paul Skelly and Jonathan Rees, partners in the Washington office, and Brian Lerner, an associate in the Miami office.