As I have previously noted (most recently here), something of an anti-ESG backlash has started to take shape, at least in certain quarters. Legislatures in several states have passed legislation prohibiting state pension funds from investing in ESG- focused investments or prohibiting the state from doing business with companies that boycott certain industries. The backlash has also taken the form of litigation, as, for example, with respect to the lawsuit recently filed against Starbucks board pertaining to the company’s diversity, equity, and inclusion initiative (DEI).

 

As Alison Frankel discusses in an October 26, 2022 post on her On the Case blog (here), and in the latest manifestation of this kind of anti-ESG litigation, a nonprofit group has filed an action against the pharmaceutical giant Pfizer based on the company’s sponsorship of a foundation offering fellowships aimed at Black, Latino, Native American and other minority candidates. This latest lawsuit is yet another indication that the companies that get caught up in ESG litigation may the companies taking ESG initiatives, perhaps more so that ESG laggards.

 

Background

Pfizer runs the Breakthrough Fellowship Program that offers accepted applicants such benefits as “professional mentorship, summer internships, post-undergraduate/post-graduate employment, and full scholarship for master’s programs.”  The fellowship requires applicants to be “Black/African American, Latino/Hispanic, or Native American.”

 

Do No Harm is a non-profit organization affiliated with conservative activist Edward Blum, the founder and President of Students for Fair Admissions, which is the Petitioner in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. University of North Carolina, the two cases before the U.S. Supreme Court in which the non-profit firm is challenging the university’s use of applicants’ race and ethnicity in college admissions. The two cases are scheduled to be argued today (October 31, 2022). Today’s Wall Street Journal has an op-ed column by Blum and entitled “Race Has No Place in College Admissions,” in which he supports the non-profits’ positions in the two cases.

 

The Lawsuit

On September 15, 2022, Do No Harm filed a lawsuit in the Southern District of New York against Pfizer, I which the non-profit alleges that the company’s foundation is “racially discriminatory” in violation of Section 1981 of the Civil Rights Act. A copy of the non-profit’s complaint can be found here.

 

Specifically, the complaint alleges that the company is “blatantly discriminating against white and Asian-American applicants” in violation of the provisions of the Civil Rights Act. The complaint also alleges that because Pfizer, a firm principally engaged in the healthcare business, accepts reimbursement from federal healthcare programs, all of its operations, including the foundation, the complaint alleges, are subject to prohibitions on racial discrimination under Title VI and Section 1557 of the Affordable Care Act. The complaint also alleges that Pfizer’s fellowship is illegal under New York State and New York City laws.

 

The complaint asserts that unidentified members of Do No Harm were injured because they were not eligible to apply for the fellowships. The non-profit seeks to prevent the foundation from selecting the 2023 fellowship class and injunctive relief barring the foundation from maintaining “racially discriminatory eligibility requirements.”

 

In its opening filings in the new lawsuit, Pfizer defended the fellowship as proper under existing U.S. Supreme Court precedent and “a legitimate, non-discriminatory basis for the use of racial selection criterion” in order to build “a workforce that represents the diversity of the communities Pfizer serves,” and to reverse “the effects of historical discrimination in the workplace.” Among many other defenses, the company argued that no employees or applicants who are not eligible for the fellowships were harmed or disadvantaged in any way.

 

The non-profit’s action against Pfizer is one of two similar lawsuits that the organization is pursuing. As Frankel notes in her blog posts, the non-profit has also separately filed a similar action against the healthcare policy non-profit Project Hope and its journal Health Affairs alleging that a fellowship that journal maintains is similarly racially discriminatory. A copy of the complaint the non-profit filed against Project Hope can be found here.

 

Discussion

The outcome of the two cases pending before the U.S. Supreme Court potentially could have a significant impact on the newly filed lawsuits against Pfizer and Project Hope. The Supreme Court cases are likely to have a lot to say about affirmative action in general.

 

In the meantime, it is clear that companies under pressure to take the initiative with respect to ESG issues, and (in this context) specifically with respect to the “S” in ESG. Although as I have pointed out on this site there is no consensus on the meaning of the three various pillars encompassed within the term “ESG,” it is generally the case that the “S” is generally thought to be referring to DEI issues and initiatives. As these two new cases, and the prior case filed against Starbucks, show, it may be that it is the companies that are taking the ESG initiative that are attracting the unwanted attention of plaintiffs’ lawyers, more so than, and perhaps rather than, the ESG laggards.

 

At a minimum, as Frankel points out, the Pfizer case may be an “important harbinger of the challenges companies may face as they try to encourage diversity and inclusion in the workplace.” While many constituencies may support efforts to diversify the workforce, the pressure to take proactive steps may put “big companies in a squeeze.”

 

It remains to be seen how these newly filed lawsuits will fare. As I noted above, in its initial appearance in the new proceeding, Pfizer has asserted numerous technical and general defenses to this proceeding (including, among other things, the absence of any support for its assertion that members of Do Not Harm were harmed).

 

But while these cases may well prove to be unsuccessful, they do underscore a point I have tried to make in the past, which is that the many assumptions that the D&O insurance industry are making about ESG many not fully account for the actual ESG risks that companies may face.

 

The general assumption for much analysis of ESG issues amongst D&O insurance practitioners is that companies that are “good” on ESG make better risks and therefore deserve some kind of (usually unspecified) underwriting advantage. The first problem with this analysis is that it assumes ESG merit is susceptible to being quantified and measured, a dubious proposition at best. The second problem is that this effort to measure ESG risk, such as it is, may not fully account for the actuality of ESG-related litigation risk. Specifically, and as noted above, companies that are “good” on ESG may not be proof against litigation risk, and, as the new Pfizer case shows, may be the ones that actually attract ESG-related litigation. At a minimum, ESG is a much more multi-dimensional issue that the usual ESG discourse amongst D&O practitioners takes into account.