Over the last few years, I have posted numerous items citing examples were sexual misconduct allegations or a hostile workplace environment have led to D&O claims. Many of these kinds of suits followed in the wake of the #MeToo movement. The fact that these kinds of allegations can lead to D&O claims is well understood in the D&O insurance industry. However, I know from recent conversations that some in the industry believe that the risk of these kinds of D&O claims has diminished as the #MeToo movement has evolved. However, recent events at the gaming company Activision Blizzard shows that unfortunately the kinds of underlying allegations that have led to claims are not a thing of the past; as discussed below, Activision Blizzard has now been hit with a securities suit based on underlying sexual misconduct and discrimination allegations.
On July 21, 2021, the California Department of Fair Housing and Employment (DFEH) filed a civil rights complaint in Los Angeles County Superior Court against Activision Blizzard and related entities. A copy of the DFEH complaint can be found here. The complaint, which reportedly is based on a two-year investigation of the company, asserts state statutory claims of gender-based employment discrimination and harassment, retaliation, and unequal pay. Among other things, the complaint alleges that the company’s leadership “consistently failed” to prevent the discrimination and harassment. The complaint alleges that the company had a “pervasive frat boy culture” that included workplace alcohol consumption and inappropriate and crude behavior toward female employees. The complaint alleges that these workplace conditions resulted in unequal pay for female employees and in the female employees being disadvantaged for promotion.
According to press reports, in response to the DFHE complaint, the company issued a statement that the company has taken allegations of misconduct seriously, but also stating that “The DFEH complaint includes distorted and in many cases false descriptions of Blizzard’s past” and that “The picture DFEH paints is not the Blizzard workplace.”
On July 26, 2021, more than two thousand former and current Activision Blizzard employees signed a petition stating, among other things, that the company’s response to the lawsuit was “abhorrent and insulting,” and that the statements have damaged the ongoing quest for equality inside and outside the company. The petition stated that in light of the allegations in the legal complaint and the company’s response “we no longer trust that our leaders will place employee safety above their own interests.” To call the lawsuit “meritless and irresponsible” while so many employees spoke out about their experience is “simply unacceptable.” The company employees later staged a walkout. The company’s CEO later issued a statement apologizing for the company’s “tone deaf” response. The turmoil has since led to a management shakeup.
According to the subsequently filed securities class action lawsuit, the company’s share price declined 6% on “the news” (without specifying which of these various news events is the one the plaintiff alleges caused the stock price drop).
On August 3, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against the Company; its CEO; its current CFO; and its former CFO. The complaint purports to be filed on behalf of a class of investors who purchased securities of the company between August 4, 2016 and July 27, 2021. A copy of the complaint can be found here.
Much of the text of the complaint consists of block quotations from the company’s SEC filings during the class period in which the company stated, among other things, that “we are party to routine claims, suits, investigations, audits, and other proceedings … such routine matters and lawsuits are not significant and we do not expect them to have a material adverse effect on our business, financial condition, results of operations or liquidity.” The complaint also contains lengthy block quotes from the company’s Code of Ethics, in which, among other things, the company says that it will not tolerate discrimination.
The complaint alleges that the defendants made misleading statements or failed to disclose that:
(1) Activision Blizzard discriminated against women and minority employees; (2) Activision Blizzard fostered a pervasive “frat boy” workplace culture that continues to thrive; (3) numerous complaints about unlawful harassment, discrimination, and retaliation were made to human resources (“HR”) personnel and executives that went unaddressed; (4) the pervasive culture of harassment, discrimination, and retaliation would result in serious impairments to Activision Blizzard’s operations: (5) as a result of the foregoing, the Company was at greater risk of regulator and legal scrutiny and enforcement, including that which would have a material adverse effect; (6) Activision Blizzard failed to inform shareholders that the California Department of Fair Employment and Housing (DFEH) had been investigation Activision Blizzard for harassment and discrimination; and (7) as a result, Defendants’ statements about Activision Blizzard’s business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiff seeks to recover damages on behalf of the plaintiff class.
Unfortunately, the underlying circumstances behind this new securities lawsuit complaint show that sexual misconduct and discrimination remains a continuing workplace problem. The sequence of events here also show how allegations of this kind of misconduct can impact the company involved and affect its reputation. And the sequence of events also shows how allegations of this kind of misconduct can lead to D&O claims.
More particularly, and to address the point I noted at the outset, this new lawsuit shows that D&O suits arising out of the sexual misconduct allegations are definitely not a thing of the past. The risk of these kinds of claims arising remains a part of the D&O risk environment. Indeed, I suspect that these kinds of claims will continue to arise until instances of the underlying misconduct cease to be a problem.
The allegations of misconduct are sadly familiar as so many company’s have been hit with the same kind of allegations. The part of this story I find interesting is the reaction of the company’s former and current employees, in amassing signatures on a petition that called out management for its defiant response to the DFEH’s complaint. There is in this sequence of event a strong message, both to Activision Blizzard and to other companies, that the kinds of allegations involved here must be taken seriously.
The problems the company is facing underscores another point I made just a few days ago in discussing the settlement of the L Brands sexual misconduct derivative lawsuit; the point is that maintaining a non-hostile workplace free of harassment and discrimination is not just a good practice, it is also an important board risk management approach. These various lawsuits underscore the importance for boards of ensuring that their companies avoid workplace practices and environments that can cause harm to employees and bring adverse publicity and even disrepute to the company.
In any event, the corporate and securities litigation trend of D&O lawsuit being filed in the wake of allegations of sexual misconduct, harassment, and discrimination – sadly – remains a current trend. As I noted above, we likely will continue to see claims of this type.