{"id":311,"date":"2023-01-30T20:08:18","date_gmt":"2023-01-31T00:08:18","guid":{"rendered":"https:\/\/blogs.duanemorris.com\/classactiondefense\/?p=311"},"modified":"2023-01-30T20:20:36","modified_gmt":"2023-01-31T00:20:36","slug":"delaware-says-corporate-officers-are-now-subject-to-a-duty-of-oversight-in-the-workplace-harassment-context","status":"publish","type":"post","link":"https:\/\/blogs.duanemorris.com\/classactiondefense\/2023\/01\/30\/delaware-says-corporate-officers-are-now-subject-to-a-duty-of-oversight-in-the-workplace-harassment-context\/","title":{"rendered":"Delaware Says Corporate Officers Are Now Subject To A Duty Of Oversight In The Workplace Harassment Context"},"content":{"rendered":"

\"\"<\/a>By Rebecca Bjork, Gerald L. Maatman, Jr., and Jennifer A. Riley<\/strong><\/p>\n

Duane Morris Takeaways: <\/em><\/strong>In a new legal development<\/em> of significant import<\/em>, employees of corporations incorporated in Delaware who serve in officer roles may be sued for breach of the duty of oversight in the particular area over which they have <\/em>responsibility, including oversight over workplace harassment policies<\/em>.\u00a0 <\/em>In its ruling in <\/em>In Re McDonald\u2019s Corp. Stockholder Derivative Litigation<\/em>, No. 2021-CV-324 (Del. Ch. Jan. 25, 2023), the<\/em> Delaware Court of Chancery <\/em>determined<\/em> that like directors, officers are subject to oversight claims.\u00a0 This decision<\/a> expands upon the rule established in <\/em>the case of <\/em>In Re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), which recognized the duty of oversight for directors.<\/em> The decision will likely result in a flurry of litigation activity by the plaintiffs\u2019 bar, as new cases will be filed alleging that officers in corporations who were responsible for overseeing human resource<\/em> functions<\/em> can be held liable for failing to properly oversee investigations of workplace misconduct such as sexual harassment.\u00a0 \u00a0\u00a0<\/em><\/p>\n

Introduction<\/u><\/p>\n

On January 25, 2023, the Court of Chancery for the State of Delaware issued a ruling that will have a substantial impact on shareholder derivative lawsuits, especially as they implicate allegations of workplace harassment.\u00a0 For the first time, corporate officers may be held liable for breach of the fiduciary \u201cduty of oversight.\u201d\u00a0 This ruling is likely to result in a multitude of court filings as the contours of this new legal rule are tested in litigation filed by plaintiffs\u2019 attorneys.\u00a0 This represents yet another reason for companies to boost their efforts at corporate compliance and to ensure that robust complaint reporting and investigation systems are in place to protect employees who claim they are victims of discrimination, sexual harassment, and retaliation.<\/p>\n

The Facts <\/u>Underlying The <\/u>Delaware Ruling <\/u><\/p>\n

In In Re McDonald\u2019s Corp. Stockholder Derivative Liti<\/em>gation<\/em>, No. 2021-CV-324 (Del. Ch. Jan. 25, 2023), the Court found that Defendant David Fairhurst, who served as Executive Vice President and Global Chief People Officer of McDonald\u2019s Corporation from 2015-2019, was liable to stockholders of McDonald\u2019s for his failure to fulfill his fiduciary duty to fulfill his oversight role over human resource practices and policies.\u00a0 As the Court explained, Fairhurst \u201cbreached his fiduciary duties by allowing a corporate culture to develop that condoned sexual harassment and misconduct\u201d and \u201cbreached his duty of oversight by consciously ignoring red flags.\u201d\u00a0 (Slip Op. at 1.)\u00a0 The Court therefore denied Fairhurst\u2019s motion to dismiss, clarifying that under the logic of Caremark<\/em>, Delaware law does recognize a duty of oversight for corporate officers.<\/p>\n

To prevail in their claims against Fairhurst, the plaintiffs had a legal challenge to surmount, in that no court had found that officers as opposed to directors had a duty of oversight in light of misconduct within a corporation.\u00a0 Even more, Delaware law presumes that directors and officers act in good faith when making decisions.\u00a0Id<\/em>. at 3.\u00a0 But the plaintiffs did have sufficient and specific facts on their side, which the Court discussed in detail.<\/p>\n

McDonald\u2019s has its principal place of business in Chicago, Illinois, and has a global workforce that exceeds 200,000 individuals.\u00a0 Id<\/em>. at 5-6.\u00a0 The Complaint alleged that the Chicago headquarters of the Company had a \u201cparty atmosphere\u201d that was encouraged by former CEO Stephen J. Easterbrook and Fairhurst, who were close personal friends. Id<\/em>. at 7.\u00a0 Weekly happy hours featured an open bar, and \u201cEasterbrook and Fairhurst developed reputations for flirting with female employees, including their executive assistants.\u201d\u00a0 Id<\/em>.\u00a0 Importantly, the plaintiffs alleged that the process for reporting human resource complaints (a company function directly under Fairhurst\u2019s control) failed to address complaints sufficiently.\u00a0 Between 2016 and 2018, more than a dozen complaints were filed with the EEOC by employees who alleged sexual harassment and retaliation.\u00a0 Id<\/em>. at 8.\u00a0 In December 2018, McDonald\u2019s employees in ten cities went on strike in protest, attracting the attention of the U.S. Senate.\u00a0 Id<\/em>. at 8-9, 12.<\/p>\n

Plaintiffs also alleged that Fairhurst engaged in acts of sexual harassment in December 2016 and November 2018, and was warned about his use of alcohol at company events.\u00a0 Id<\/em>.\u00a0 He was terminated in November 2019 after committing yet another act of sexual harassment. Id<\/em>.\u00a0 \u00a0And in October 2019, the Board of Directors learned that Easterbrook was engaging in a prohibited relationship with an employee, and he was terminated after an investigation by outside counsel.\u00a0 Id<\/em>. at 15.<\/p>\n

The crux of the reasoning behind the Court\u2019s ruling is that an officer of a corporation has a fiduciary duty to oversee the corporation\u2019s activities that fall within his or her role in the corporation.\u00a0 As the Global Chief People Officer at McDonald\u2019s, the Court opined that \u201c[Fairhurst] had an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board, and he could not consciously ignore red flags indicating that the corporation was going to suffer harm.\u201d\u00a0 Id<\/em>. at 3.\u00a0 Simply put, his human resources role required that he act in good faith to maintain an awareness of potential liability resulting from improper workplace conduct, and the Court found that he did not do so. \u201cCorporate fiduciaries can face liability if they knowingly fail to adopt an internal information and reporting system that is \u2018reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation\u2019s compliance with law and its business performance.\u2019\u201d Id<\/em>. at 24 (citation omitted).\u00a0 Because plaintiffs pled specific facts sufficient to allege that Fairhurst ignored red flags surrounding sexual harassment and the Company\u2019s failed complaint system, the Court denied Fairhurst\u2019s motion to dismiss.<\/p>\n

Conclusion<\/u><\/p>\n

While the Court\u2019s decision is notable because it established a new fiduciary duty applicable to corporate officers, it is not a surprising outcome.\u00a0 The logic of Caremark<\/em> leads inevitably to this decision, once it is established that corporate officers have real power and obligations within a corporation to manage risk.\u00a0 Because workplace harassment and retaliation claims pose very high risks to a corporation, it is to be expected that an officer responsible for the human resource function will come under strong scrutiny when EEOC charges and lawsuits are filed.\u00a0 The best defense to a high stakes workplace lawsuit is to prevent it from being filed in the first place.\u00a0 Ensuring that the proper systems for reporting and investigating workplace complaints are in place is by far preferable to litigating a case like this one.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Rebecca Bjork, Gerald L. Maatman, Jr., and Jennifer A. Riley Duane Morris Takeaways: In a new legal development of significant import, employees of corporations incorporated in Delaware who serve in officer roles may be sued for breach of the duty of oversight in the particular area over which they have responsibility, including oversight over … <\/p>\n

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