Corporate DEI is now a recipe for lawsuits
And potential liability extends to individuals, not just the corporation
Edward Blum has won another victory over DEI. The Atlanta-based Fearless Fund will shutter its discriminatory grant program for black women. The Fund awards $20,000, digital tools for business development, and mentorship to businesses. But only businesses owned by black women are eligible for these benefits.
The Fund decided not to appeal a ruling by the U.S. Court of Appeals for the Eleventh Circuit that its program likely violates Section 1981, the federal prohibition against race discrimination in making and enforcing private contracts. The Court ordered entry of a preliminary injunction blocking the Fund from administering its program.
Fearless Fund decided not to appeal the adverse decision because it feared the Supreme Court would rule against it. Such a ruling would apply to similar programs nationwide, not just those administered within the jurisdiction of the Eleventh Circuit.
Blum’s group, the American Alliance for Equal Rights, has produced a documentary called "Corporate DEI is Now a Recipe for Lawsuits." You can watch the video here.
But who is liable when lawsuits challenge corporate DEI under Section 1981? Obviously, the corporation is liable. But what about individual decisionmakers within the corporation?
Dan Morenoff, executive director at the American Civil Rights Project, considers this question in an article for the Federalist Society. (Note: I serve on the board of directors of the American Civil Rights Project.)
As Dan shows, the law is clear that individuals responsible for a corporation’s Section 1981 violation are personally liable for the damages worked. At least eight circuit courts of appeals have so ruled. No court of appeals has ruled otherwise.
But being held personally liable doesn’t mean much if, in practice, the person held liable doesn’t have to pay damages. And, as Dan points out, “many (if not most) corporations maintain insurance to protect their officers and directors from job-related liabilities, and even more provide for the indemnification of such officers and directors by the corporation for the same.”
However, Dan goes on to say:
For more than a century, courts have rejected as contrary to public policy contracts to indemnify or insure parties for their own intentional violations of law. For this reason, courts routinely note that enforcing contracts that would exculpate wrongdoers for intentional illegal acts is incompatible with laws prohibiting those acts. This makes sense, as a policy covering damages resulting from intentional violations of law is better described as a criminal conspiracy than as an insurance arrangement. [Citations omitted]
Therefore,
[O]fficers and directors should consider the likelihood that, should claims against them arise and be fully litigated,[the resulting liabilities’ incidence would almost surely fall entirely on their shoulders. Here, personal liability really should mean personal liability. [Citations omitted]
A corporation’s officers and directors might also be liable to shareholders as a result of their entity’s violations of anti-discrimination law:
Among the fiduciary duties state laws impose on corporate officers and directors are duties of loyalty and of care. While different states’ courts describe it differently, they consistently hold that there is a duty to comply with substantive law that falls under one or the other of these duties. . . .
Accordingly, American fiduciary law appears to uniformly require officers and directors to abide by substantive law in how they run a corporation. As with other fiduciary principles, this one is usually policed by shareholders bringing derivative suits in the name of the corporation they partly own.
To defeat personal liability, a corporation’s directors and officers would likely argue that the “business judgment rule” shields them. Dan considers this defense:
Normally, a challenge to a corporate act as a fiduciary breach would need to overcome the high hurdle imposed by the business judgment rule. That rule generally protects corporate officers and directors from personal liability for decisions they make in the exercise of their reasonable business judgment that such acts would benefit a corporation. However, just as every state I’ve examined carves out knowing decisions to violate substantive law from the universe of allowed options for corporate fiduciaries, every state I’ve examined that has addressed the issue also carves out such decisions from the application of the business judgment rule.
(Emphasis added)
Corporate directors and officers would likely claim that they did not knowingly violate the law because they relied on advice of counsel. But there are limits to this defense:
“Reliance . . . is not a complete defense . . . [since] that would reward a [fiduciary] who shopped for legal advice that would support the [fiduciary]’s desired course of conduct or who otherwise acted unreasonably in procuring or following legal advice.” [Citation omitted]
While the exact parameters of unreasonably relying on legal advice have not been fully mapped, it is sufficiently clear that “subjective good faith standing alone is not a defense” when such reliance “fell short of reasonable standards.” This means that even if a fiduciary acted in reliance on legal advice he actually believed to be valid, he cannot enjoy the defense if his belief was unreasonable. It is worth noting that the opposite should not be inferred: subjective bad faith (reliance on advice a fiduciary does not actually believe to be valid) should negate a reliance on the advice of counsel defense even where a hypothetical reasonable fiduciary would have followed that advice. [Citations omitted]
This distinction means that an advice of counsel defense to a fiduciary breach claim against officers and directors who adopt, implement, or retain discriminatory policies could pan out differently for different defendants. What a non-lawyer defendant could reasonably rely on may well differ from what a lawyer defendant could accept as reasonable legal advice. Put differently, in litigation of such claims, all non-lawyer individual defendants’ first line of defense would almost surely be to blame their lawyer co-defendants (especially those in a general counsel’s office) for their decisions in terms that would most likely leave those co-defendants fully exposed to liability. [Citations omitted]
In sum, not only is corporate DEI now a recipe for lawsuits. It can also lead to personal liability against corporate employees, officers, and directors.
Great post. This is a field where we have to tread carefully, however, for officers and directors, just like cops, prosecutors, judges and presidents, need latitude to perform their duties without fear of liability. Jim Dueholm
Excellent article. Thank you.
I share Mr. Dueholm’s cautionary note.