The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Cases alleging violations of wage and hour laws have been a growing source of litigation activity in recent years. These cases present a variety of allegations, such as unpaid overtime, employee misclassification, and failure to pay minimum wage. A March 21, 2011 NERA Economic Consulting publication entitled “Recent Trends in Wage and Hour Settlements” takes a look at evolving settlement patterns in these cases. The report, which can be found here, contains a number of interesting observations and underscores the litigation risk that these cases present. The report’s findings have a number of important Employment Practices Liability implications, as discussed below.

The report examines 187 wage and hour case settlements reported between 2007 and 2010. The report notes in a footnote that the settlement data, derived from a number of sources, while inclusive of a large number of settlements, “is not likely to be comprehensive.” In addition, some potentially significant settlements were excluded due to incomplete information. Moreover, the settlement information regarding 48 of the 187 cases studied is confidential. For that reason, many of the observations in the study may be more a reflection of the data available that of the overall trends. Notwithstanding the possible data constraints, the report reflects a number of interesting observations.

Over the entire four year period of the study, the average settlement per case was $12.8 million and the median settlement was $4.3 million. However, these summary statistics “mask a large range of settlement values.” About 25% of all settlements were under $1 million, while about 20% settled for $20 million or more.

In addition, the report reflects a “sharp decrease “in both the average and median settlements in 2009 and 2010 relative to 2007 and 2008. This apparent difference may be a reflection of the data available. For example, in the first two years of the period there were very few reported settlements under $1 million, while in the last two years there was an increased proportion of these smaller settlements. The low number of these smaller settlements in the first two years “may be a result of data limitations.” The pattern in the data could be explained “if lower-value settlements were systematically less publicized in earlier years’”

Of course, the relative absence of lower settlements in the two earlier years may also reflect “differences in the underlying characteristics” of the cases during that period. The study does reflect that the nature of the cases shifted in the second two years of the study period. There were more overtime and off-the-clock allegations in the second two years and relatively fewer misclassification cases in those years than in 2007 and 2008. The report notes that “cases with overtime allegations tend to settle for lower amounts,” when controlling for other factors.

Two specific factors seem most determinative of settlement size, the number of class members participating and the duration of the class period. The number of plaintiffs involved in the cases varied widely, with about 80 cases involving fewer that 1,000 plaintiffs while six cases had more than 100,000 plaintiffs. The average per-plaintiff settlement amount was $5,700 and the median amount was $3,500. The average settlement amount per year of the class period was $1.2 million. The average settlement amount per plaintiff-year was about $1,000. Consistent with the overall settlement trends, the average per plaintiff settlement and the average per year settlement amount declined in the second two years of the four year study period.  

Discussion

The NERA study provides a detailed if not entirely comprehensive overview of the severity risks associated with these kinds of cases. It is apparent that the settlements examined in the NERA study were largely class or at least mass actions involving large numbers of plaintiffs acting collectively. Nevertheless the per plaintiff settlement data may be useful in assessing wage and hour cases that are not presented as collective actions.

The study certainly does underscore the seriousness that wage and hour collective actions may represent to employers. The settlement amounts obviously do not include the costs that the various defendant companies incurred in defending these actions. But taking the additional if not precisely known costs of defense in account, it is clear that these kinds of cases represent a serious exposure for the defendant companies.

The typical Employment Practices Liability (EPL) insurance policy contains exclusions for wage and hour cases. The usual carrier explanation for these exclusions is something along the lines that insurance for this liability would create a moral hazard, as it might otherwise encourage employers to withhold pay owed to employees with the idea of shifting the compensation expense to the insurer. A June 2010 National Underwriter article discussing EPL coverage issues involving these types of claims can be found here.

But while the liability for these cases is typically excluded, EPL policies increasingly include some defense cost protection for these kinds of claims, often on a sublimited basis. The NERA report underscores the seriousness of these kinds of claims, which in turn highlights the importance for the defendant companies of mounting an effective defense. For that reason, the inclusion of the defense cost coverage for wage and hour claims, even if sublimited and even if subject to a self insured retention, could represent a valuable coverage extension for insured companies.

It is important to note that not all EPL policies contain this coverage extension, and that some carriers will provide this extension only upon request. This issue represents one more reason why it is critically important for insurance buyers to retain knowledgeable and experienced brokers in their insurance purchases.  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

NYSE Commission on Corporate Governance: On September 23, 2010, the NYSE Commission on Corporate Governance issued a report (here) following a two year review of governance issues and considerations. The Commission, chaired by Larry Sonsini of the Wilson Sonsini law firm, included more than two dozen members representing a broad range of constituencies, and its report presents an interesting and thoughtful review of the issues and statement of principles. The NYSE’s September 23, 2010 press release concerning the report can be found here.

The report’s centerpiece is its statement of ten principles of corporate governance, but in addition to distilling its analysis down to these ten principles, the report also helpfully reviews the history of events leading up to is report, including the recent history of corporate governance reform. In explaining its ten principles, the report states the Commission’s belief that "the respective roles of boards, management and shareholders needed greater understanding," and the principles primary focus is the respective roles of each of these three groups.

The board’s role, according to the report, is "to steer the corporation towards policies supporting long-term sustainable growth in shareholder value." While noting that other factors may affect long-term shareholder value, the report states (significantly in my view) that "shareholders have the right and responsibility to hold a board accountable for its performance in achieving long-term sustainable growth in shareholder value."

The report notes the critical role of management in establishing proper corporate governance, emphasizing that "successful governance depends heavily upon honest, competent, industrious managers." The report also noted that "constructive tension" between the board and management, if properly modulated, may be a characteristic of good corporate governance.

With respect to shareholders, the report takes a firm stand against short-termism. The report notes that investors have a responsibility to vote their shares in a "thoughtful manner." In a couple of different places, the report also expresses concern about the possibility of investors’ over-reliance on proxy advisory firms, noting that the decision to rely on advisory firms "does not relieve institutions from discharging their responsibility to vote constructively, thoughtfully and in alignment with the interests" of their clients.

The report is interesting, relatively brief and worth reading in its full length. Hat tip to the CorporateCounsel.net blog for the link to the report.

Norwegian Bank Files Individual Securities Suit Against Citibank: Citigroup may have settle the subprime-related enforcement action and even managed to get the court to accept the $75 million settlement (even if with certain provisos), but a separate subprime-related securities class action lawsuit on behalf of Citigroup investors remains pending. Despite the continuing existence of the class action, Norges Bank, which manages investments for the $450 billion Norwegian sovereign wealth fund, has now filed its own securities lawsuit, seeking separately to recover for the fund’s losses.

According to Victor Li’s September 24, 2010 Am Law Litigation Daily article (here), Norges filed a complaint in the Southern District of New York against Citigroup and 20 of its current and former directors and officers (including its current CEO, Vikram Pandit). The complaint alleges that because of the defendants’ misrepresentations about the company’s subprime exposure, Norges purchased Citi shares at inflated prices from January 2007 to January 2009. The bank claims it paid over $2 billion for the shares and claims to have lost over $835 million.

There are a number of interesting aspects to this case. The first is that the bank concluded that notwithstanding the existence of the shareholder class action lawsuit, its interests were better served by proceeding separately from the class. The other thing about the lawsuit is the sheer size of the claimed losses – its losses alone are far greater than the collective investor losses in most securities class action lawsuits.

The massive size of Norges’s claimed losses explains its desire to pursue litigation, but the initiation of a separate suit can only be explained either by Norges’s assumption that it will fare better separately than within the class, or perhaps that it will pay lower fees – or perhaps both.

The Norges lawsuit follows on the heals of the separate opt-out lawsuit filed against Merrill Lynch on behalf of the New York pension funds, about which I commented here. The phenomenon of large institutional investors electing to pursue their own claims was a characteristic of many of the lawsuits arising from the corporate scandals during the last decade. Though these kinds of cases had seemed to have died down for a while, the New York lawsuit against Merrill and the Norges suit suggest that the individual lawsuits may be back – and that large institutional investors may be considering them in preference to class actions.

The seeming rise of this phenomenon has been a matter of significant discussion and some concern, as the prospect of multiple individual lawsuits could overwhelm the putative procedural advantages and effectiveness of the class action process.

The magnitude of Norges Bank’s claimed losses may be sufficiently unusual to raise a question whether there may be other investors similarly motivate to pursue separate lawsuits – there simply are going to be few individual investors in few circumstance with losses of that magnitude. Of course, there is always the possibility of smaller investors with smaller losses getting into the act, which they might do if they too believe they will fare better separately rather than within the class.

The prospect for other investors to conclude that their interests are better served through an individual action is a prospect that could pose a host of challenges and represents a "worrisome trend," as I have previously discussed here.

My previous post discussing the Norwegian sovereign wealth fund can be found here.

More Credit Union Troubles: On September 24, 2010, the National Credit Union Administration announced a series of moves, including the seizure of three wholesale credit unions, as part of an overall effort to shore up the country’s credit union industry. The move also included the creation of a $30 billion guarantee to backstop the credit union industry in an effort to stave off further losses. The Wall Street Journal’s September 25, 2010 front page article about the NCUA’s actions can be found here.

Wholesale credit unions provide back office services to retail credit unions. Since March 2009, bad investments in mortgage-backed securities have resulting in the government takeover of five of the country’s 27 wholesale credit unions.

At least one of these wholesale credit union failures has resulted in a civil action by the NCUA against former directors and officers of the failed institution. As discussed here, on August 31, 2010, the NCUA initiated an action against former directors and officers of Western Corporate Federal Credit Union of San Dimas, California.

It is unclear from the NCUA’s latest announcement and actions whether the NCUA might pursue additional lawsuits against the directors and officers of other failed institutions. However, it is clear that the same kinds of difficulties that have beset the commercial banking sector are also troubling the credit union industry as well, and these troubles at a minimum additional may mean regulatory seizures and also present at least the possibility of further claims.

Finally, the NCUA’s moves are a reminder that two full years out from the most tumultuous moment of the credit crisis, the reverberations continue to vex the financial services industry.

Layoffs Mean More Job Bias and Disability Claims: According to Nathan Koppel’s September 24, 2010 Wall Street Journal article (here), layoffs arising from the economic downturn are resulting in a "rising number of claims" that companies "illegally fired workers on account of age, race, gender or medical condition." Among other things, the article cites EEOC statistics showing that for the six months ended April 30, 2010, more that 70,000 people had filed claims alleging job discrimination, which represents a 60% increase in bias claims compared to the same period a year earlier.

The article also notes that companies are also facing "a rising tide of disability claims," noting that more than 21,000 people filed disability claims last year, which represented a 10% increase over the prior year and a 20% increase over 2007. The article notes the difficulties financial troubled companies may face trying to accommodate disabled employees.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Every now and then, I read a court opinion on a coverage issue, and though I can understand how the court reached its decision, I still find the outcome surprising and troubling. A January 19, 2010 per curiam opinion from the Connecticut Supreme Court (here) involving a coverage dispute under an Employment Practices Liability (EPL) policy presents a recent example of this kind of decision. The court’s analysis is internally logical, but I suspect the outcome would surprise most EPL policyholders and even many insurance practitioners. The decision may have important implications for the placement and administration of EPL insurance.

Background and the Connecticut Supreme Court’s Decision

National Waste Associates was purchased an EPL policy for the period February 15, 2007 to February 15, 2009. On May 12, 2007, a former employee brought a wrongful discharge action against National Waste. National Waste submitted the claim to its EPL carrier. The carrier refused to provide a defense or to indemnify the firm. National Waste filed a lawsuit seeking a judicial declaration of coverage.

The carrier took the position that coverage was precluded by the EPL policy’s prior or pending action exclusion. The exclusion provides that the policy does not provide coverage for any claim "based upon, arising out of, [etc.] … any fact, circumstance, situation, transaction, event or wrongful act underlying or alleged in any prior or pending civil, criminal or administrative or regulatory proceeding."

The carrier contended that the prior or pending action exclusion had been triggered by the proceedings the employee had brought in 2005 to obtain unemployment benefits. As later recited by the Connecticut Supreme Court in its review of the case, the former employee had claimed, both in pursuing unemployment benefits and in the later wrongful discharge action, that she had been wrongfully discharged after resisting National Waste’s alleged invasion of her privacy.

The trial court agreed with the carrier that the unemployment benefit proceedings clearly constituted prior "administrative proceedings" within the meaning of the policy and granted the carrier’s motion for summary judgment. National Waste appealed.

In its January 19 per curiam opinion, the Connecticut Supreme Court affirmed the trial court, adopting the trial court’s reasoning.

Discussion

The court’s reasoning is straightforward and internally logical, particularly if the unemployment benefits proceeding is, as seems to be the case, fairly characterized as an "administrative proceeding" within the meaning of the policy.

But as noted in a January 21, 2010 memorandum about the ruling from the Murtha Cullina law firm entitled "Employment Practices Liability Insurance: Surprise Coverage Interpretation" (here), the outcome "no doubt shocked" the employer. The law firm memo identifies the sharp distinction between, for example the circumstances that might be involved had the former employee raised an EEOC charge of discrimination in a prior period, and the circumstances actually presented, with the former employee’s prior filing of proceedings for unemployment benefits.

As the law firm memo observes:

Unemployment compensation claims are not only very common, but they are typically handled very differently by employers. (For example, employers rarely if ever engage legal counsel to attend unemployment compensation hearings.) The standard for denying unemployment benefits is so high that employers often do not even contest the claims. Even if they do contest, most former employees who lose their jobs for any reason collect benefits. If fact, a claim for unemployment benefits is not even really a claim "against" the employer – it is a claim for state benefits that are funded by a tax on all employers. Moreover no EPLI policy provides coverage for unemployment claims.

In light of all of these practical circumstances, it would come as an unexpected and inexplicable revelation to most employers to learn that an unemployment benefits claims in one policy period could preclude coverage for an employment practices claim in another period. The implication is that the employer has to notify their EPL carrier of the unemployment benefits claim in order to preserve EPL coverage if the former employed later files an employment practices claim.

Most employers would be completely astonished to learn that their EPL carrier expects to be provided with notice of unemployment benefits proceedings. Indeed the revelation of this expectation is so unanticipated that it has the feel of a trap for the unwary.

The message for policyholders and their advisors hoping to avoid the trap seems to be that companies should provide carriers with notice of every single instance where an employee or former employee seeks unemployment benefits. However, given the frequency of these types of proceedings, I suspect strongly that if policyholders gave notice of every instance where an employee or former employee is seeking unemployment benefits, the carriers would quickly find themselves drowning in paper. I doubt the carriers would really want what would ensue.

And regardless of what the carriers may want or even expect, it is a serious question whether, as a practical matter, it is fair to penalize companies for failing to take actions that the most companies would have no idea are required of them.

This may be one of those instances where the professional liability industry needs to come together to craft a solution to prevent an outcome that no one could possibly really want. (I have in mind the recent sequence of events where the D&O industry, in order to avert the consequences of an unexpected coverage decision, quickly took steps to try to eliminate the possibility of a carrier arguing that a Section 11 settlement did not represent covered "Loss.)

Maybe I am being optimistic, but perhaps policyholder representative and the carriers can find a solution that will ensure that EPL insurers will not take the position that an action for employment benefits is not a "claim" or an "administrative action" within the meaning of the policy.

I recognize that some readers may take exception, perhaps strong exception, to my analysis. I invite readers to submit their views using the comment feature on this blog.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

According to its January 6, 2010 press release (here), the U.S. Equal Employment Commission announced that near record numbers of workplace discrimination charges were filed with the agency in the fiscal year ending September 30, 2009. As reflected in the agency’s statistical presentation, there were 93,277 charges filed in FY 2009, which is the second-highest number the agency has recorded.

The highest annual number filings occurred in FY 2008, when 95,402 charges were filed. The FY 2009 filing levels were about 2.2% below the FY 2008 levels, but still well above any prior year. After 2008, the next closest year in terms of filing activity was FY 2002 (during the prior economic downturn), when there were 84,442 filings.

Consistent with recent historical trends, the most frequently alleged types of discrimination are race (36%), retaliation (36%) and sex-based discrimination. (A single charge filing may allege multiple types of discrimination.) Allegations based on age-based disability (up about 10%), religion (up 3%) and/or national origin (up 5%) hit record highs. Allegations of age-based discrimination reached the second-highest level ever.

The EEOC also reported that through its enforcement, mediation and litigation programs, the agency "recovered more than $376 million in monetary relief for thousands of discrimination victims."

The EEOC’s press release states that the "near-historic level of total discrimination charge filings [in FY 2009] may be due to multiple factors," including "greater accessibility of the EEOC to the public, economic conditions, increased diversity and demographic shifts in the labor force, [and] employees’ greater awareness of their rights under law."

The sustained record level of EEOC charge filings during the fiscal years 2008 and 2009 should be a matter of concern for every employer. These figures not only underscore the need for every employer to adopt and implement best employment practices, they also highlight the need for every employer to procure employment practices insurance as a critical and indispensible part of their insurance program.

The EEOC’s suggestion that the heightened level of filings of individual charges is due in part to the economic conditions and to employees’ greater awareness of their rights also suggests that, as the current economic downturn drags on, the elevated filing levels could continue for some time to come.

A January 6, 2010 National Law Journal article about the EEOC’s statistical release can be found here (registration required).

Another Securities Class Action Trial: We are all awaiting the outcome of the long running Vivendi trial, which is just wrapping up this week in the Southern District of New York. But while all eyes were on the Vivendi trial, few of us noted that another securities class action trial was going on in the Central District of California, in the American Mutual Funds Fee Litigation.

Kudos to Adam Savett of the Securities Litigation Watch blog, who first brought this development to my attention in his blog post here.

The case apparently went forward as a bench trial this past summer before Judge Gary Feess, whose December 28, 2009 post-trial Findings of Fact and Conclusions of Law can be found here. Essentially, the plaintiffs alleged that the defendants had violated the federal securities laws by charging excessive advisory and distribution fees. Judge Feess concluded that the plaintiffs had not sustained their burden of proving that the fees were so "disproportionately large" that they bore "no reasonable relationship" to the services, as the plaintiffs were required to show in order to prevail.

As the Securities Litigation Watch details here, there have now been 22 post-1996 securities class action lawsuit cases that have gone to trial (not counting Vivendi), eight of which involved post-PSLRA conduct and that have actually gone to verdict. Taking into account post-verdict motions and appeals, the current scoreboard on these post-PSLRA lawsuit verdicts (according to the SLW’s data) now reads: Defendants 5, Plaintiffs 3. (Soon to be updated, I suppose, after the Vivendi jury reaches a verdict.)

Andrew Longstreth’s January 6, 2009 American Lawyer article about the American Mutual Funds Fee Litigation verdict can be found here.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link