In my recently published survey of the top topics in the world of directors’ and officers’ liability and insurance, and in connection with my discussion of ESG issues, I briefly mentioned the lawsuit that was filed last week against directors and officers of Starbucks in connection with the company’s “Diversity, Equity, and Inclusion” (DEI) policies. Because there are a number of notable aspects of this lawsuit, it is worth taking a closer look at the suit. As discussed below, the lawsuit represents yet another instance of anti-ESG backlash and illustrates how companies taking the initiative on ESG issues could incur scrutiny and litigation risk. A copy of the recent complaint can be found here and a copy of the plaintiff’s August 31, 2022 press release can be found here.
In October 2020, Starbucks announced on its corporate website its adoption of a series of policies calculated to realize the company’s “commitment to Inclusion, Diversity, and Equity.” At the time of the policies’ adoption, the company committed to “taking further actions toward tangible and lasting change.”
The National Center for Public Policy is a conservative non-profit think tank based in Washington, D.C. The organization also claims to be a Starbucks shareholder. On March 25, 2022, the American Civil Rights Project, acting on behalf of the plaintiff, published an open letter to the directors and officers of Starbucks warning the company’s executives of “the risks to which the Policies expose Starbucks and its shareholders.” A copy of the letter was also sent to the company. The letter alleges that the company’s DEI policies violate federal and state civil rights and anti-discrimination laws and expose the company to substantial legal liabilities. The letter demanded that the company retract the policies and immediately cease implementing them. On July 22, 2022, the company’s legal counsel sent a response letter stating that it would not be in the company’s best interest to retract the policies.
On August 30, 2022, the plaintiff filed a complaint in the Spokane County (Washington) Superior Court against certain Starbucks officers and directors. The complaint alleges that the Starbucks DEI policies “required Starbucks to discriminate based on race” and facilities “Starbucks’ active discrimination based on race in its employment decisions”; requires Starbucks to discriminate in its compensation of its officers based on the race of their workforce; and requires the company to discriminate in its contracting with its suppliers and media companies, based on the race of potential vendors’ ownership.”
The complaint alleges that the company’s directors and officers “crafted and publicized these policies with fanfare, preening over the supposed moral virtue their adoption signaled.” However, the complaint alleges, “the policies they trumpeted so flagrantly violate a wide variety of state and federal civil rights laws.” The policies also “invite a nearly endless collection of meritorious lawsuits.” The policies, the complaint alleges “endangered Starbucks and the interests of all of its shareholders” in violation of their fiduciary duties,” and they did so in order that they could “pose as virtuous advocates” of DEI – “even if it harms the company and its owners.” The defendants, the complaint contends, should be stopped from violating the civil rights laws and “from diverting the shareholders’ corporate resources to their personal use in buying themselves social credit.”
The complaint seeks a judicial declaration the company’s policies violate federal and state civil rights and anti-discrimination laws and expose the company to material liabilities; seeks preliminary and permanent injunctive relief enjoining the directors and officers from continuing to implement the policies; and seeks an award to the company of the damages it has sustained as a result of the defendants’ breaches of their fiduciary duties.
Although there is a lot of imprecision in the way the expression “ESG” is used, generally when people use the term they are referring, with respect to the “S” aspect, to the adoption of DEI programs. When advocates seek to advance ESG goals, they are typically referring, again with respect to the “S” component, to DEI. Many companies, seeking to demonstrate that they are “good” on ESG, cite their companies’ DEI efforts.
However, as I noted in a recent post, there is a form of anti-ESG backlash that is emerging. At least 17 U.S. states have adopted or proposed anti-ESG legislation. This legislation limits the ability of state governments, including public retirement plans, to do business with entities “boycotting” industries based on ESG criteria or considering ESG factors in their investments.
The new lawsuit against Starbucks shows that the anti-ESG backlash not limited just to legislation. As the lawsuit shows, the backlash can also take the form of litigation as well. The lawsuit also shows that there not only are advocates that will challenge companies for the lack of ESG initiative, there also are advocates that will challenge companies that are proactive on ESG. Thus, companies that are active on ESG issues could find themselves stepping into a political firestorm. And as this lawsuit shows it could subject the company to litigation risk as well.
I think the prevailing liability assumption about ESG matters is that companies that fail to address ESG issues are potential subject to scrutiny and even litigation risk. This case shows that the ESG liability risks are actually more complex and more multifaceted than that. Indeed, as I have noted I prior posts (refer here and here), there have already been several instances where companies that have active ESG initiatives have been hit with securities suits for their pro-ESG actions. The broader range of ESG risks may include claims risks that are far different than is usually assumed in discussions of potential future ESG claims.