Can DEI Initiatives Bring Litigation Risks?

Companies’ diversity, equity and inclusion (DEI) efforts are front page news.  Institutional investors are vocal about the importance of diversity in a company’s workforce, particularly on its management team, as well as on the board of directors. Human capital management practices were the focus of recent disclosure requirements issued by the Securities and Exchange Commission in August 2020 (which the SEC has indicated may be enhanced in the near future). And some companies are beginning to tie executive incentive compensation to DEI or other human capital metrics. A recent jury verdict, however, highlights the complexities involved when operationalizing diversity goals. 
 
In Duvall v. Novant Health, Inc., a North Carolina jury awarded $10 million in punitive damages to a former executive of the defendant employer, a not-for-profit health system with 15 medical centers and more than 1,800 physicians. Duvall, a white male, was hired as senior vice president of marketing and communications by Novant Health in August 2013. In his complaint, he alleged that he was fired in July 2018 and replaced with two female executives, one white and one black. Duvall alleged that his termination was unlawful discrimination on the basis of his gender and race, because he was fired “for the express purpose of increasing gender and racial diversity among Novant executives.”  
 
The jury found that Duvall had proven that his race and/or gender were a motivating factor in Novant’s decision to terminate him and that Novant did not have a legitimate business reason for his termination irrespective of his race and/or gender. Duvall in his complaint focused on Novant Health’s public statements where it allegedly “boasted” about an intentional campaign to promote diversity in its management ranks. It seems undeniable, then, that the public nature of Novant Health’s efforts to diversify its management team was a fact successfully used against it for litigation purposes.
 
Novant Health has stated that it intends to appeal. And it is important to note that this was a jury verdict, not a precedential judicial decision, and the verdict and $10 million damages award may be modified or overturned on appeal. Nonetheless, the verdict and the legal arguments the plaintiff successfully utilized underscore a latent risk associated with DEI initiatives, particularly ones that are publicly touted and appear to be outcome-based:  litigation risk.
Boards and management teams thus face a dilemma. While understanding the value of a diverse workforce and management team (and responding to investor attention on the same), they must be mindful of employment laws that prohibit the consideration of race and/or gender when making employment-related decisions. This is a developing landscape, but here are some preliminary observations this case has brought to the forefront of our minds: 
 
1. Process and Culture. One strategy that may help minimize unnecessary litigation risk would be to adopt process-oriented DEI goals, rather than results-oriented goals. For example, a company that wants to achieve gender parity among its senior leadership may commit to a hiring practice that at least 50% of each slate of candidates interviewing for an opening or promotion be women.  Contrast that approach with one that commits to having at least 20% of the company’s SVP positions being held by women by a date certain. Companies may also consider programmatic initiatives such as developing gender affinity groups or mentorship programs.
 
2. Long Game. Creating a diverse workforce and management team may take longer than expected and should not be rushed or forced. 
 
3. Disclosure. Even if a company establishes particular DEI efforts or initiatives, it should weigh any potential benefits of publicizing those efforts against the risks such publicity may create. Particular care should be taken by companies that would be required to disclose the efforts (for example, a public company that plans to include a DEI goal in the incentive-based compensation package of a named executive officer). And, public companies should consider how any such initiatives would factor into the company’s overall human capital management strategy, which also must now be disclosed. 
 
4. Dispute Resolution. Employers may want to use the Duvall verdict as a touch point to reflect on the documents all or certain employees are required to sign (such as employee handbook acknowledgements, confidentiality and IP assignment agreements, employment agreements or other arrangements that provide severance protections). Do those agreements include arbitration provisions or waivers of the right to a jury trial? If not, should they?  
 
5. Novel Legal Argument. Duvall v. Novant Health, Inc has led us to consider whether certain employers may be able to defend their efforts to diversify their workforce by asserting that a diverse workforce that is reflective of the employer’s community or customer base is a legitimate business purpose under anti-discrimination laws (many of which allow employers a safe harbor for facially discriminatory employment actions made for legitimate business reasons). In a way, this argument is reminiscent of the argument universities use to defend their pro-diversity admissions programs from legal challenges – that diversity is an intrinsic goal of an educational institution.  
 
Developments in this area, such as the award made by the jury in Duvall v. Novant Health, Inc., highlight the importance of, and put a spotlight on, company-sponsored DEI initiatives. Balancing the interaction of legal compliance, investor sentiment and the company’s own philosophy on appropriate human capital management practices is becoming a board-level issue. Given these considerations, what is a reasonable next step for boards? As an initial matter, boards should consider how these types of human capital management issues are currently governed within their companies. Does the board, or a committee thereof, receive information or have any oversight of these functions? If not, should they, and how? The prioritization of workforce and management composition by regulators and investors, and the resulting impact on companies’ practices and employees, customers and clients, means that human capital management practices, including DEI initiatives, warrant commensurate attention by boards.

Robin Melman is a partner at Baker Botts LLP.

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