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ANALYSIS: Forced Arbitration Ban to Spur Corporate Disclosures

March 23, 2022, 9:00 AM

The recently enacted Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 abruptly halts a common corporate practice of requiring arbitration of sexual harassment claims in employment contracts, creating more risk for many companies.

The law will likely lead to internal corporate risk assessments and, for public reporting companies, an increase in internal investigations and more robust public disclosures. These actions could shine an unflattering light on the oft-hidden bad behavior of corporate executives and on any corporation found to have helped keep the unsavory details under wraps, damaging reputations and disrupting business as usual.

The new law bans forced arbitration for sexual assault and harassment claims by prohibiting companies from enforcing contract provisions that require the diversion of sexual harassment and sexual assault workplace claims from the courts to third-party arbitration.

Mandatory arbitration clauses for sexual harassment claims, combined with nondisclosure agreements, commonly known as NDAs, have helped conceal or limit the damage to corporate executives and their employers and likely substantially reduced the costs of defending those claims. The clauses have almost certainly helped to keep settlements, or the size of adverse judgments, more modest in many cases.

Companies Owe More Disclosure as Risks Grow

The new law puts a stop to the forced diversion of sexual harassment claims away from the courts. Companies will thus have to grapple with the uncertainty of potentially large judgments, including punitive damages. These potential scenarios will likely convince more and more public companies to describe the sexual harassment risk to their businesses in their SEC filings.

From a securities regulation perspective, the core determinant as to what a registered company should publicly disclose is whether the information would be material to an investor trying to make an informed investment decision. The greater the potential risk to the company, the more likely that such information needs to be disclosed in its SEC filings. The tension between this legal obligation and a company’s desire to present a positive public image is sure to increase.

Although the nature of this risk will vary from company to company, the risk isn’t simply the monetary costs of defending and paying settlements or judgments. A company may face significant reputational risks that can impair its brand and the company’s market value. Management may be distracted while defending against claims, thereby harming the business, and the greater public exposure of these court-litigated allegations (as opposed to closed-door arbitration) increases the risk that companies will lose key personnel who may be difficult to replace.

Effective risk factors in SEC filings will tailor disclosures to a public company’s unique facts and circumstances and avoid generic or “boilerplate” statements about risk. Some industries with cultures that have in the past been revealed to tolerate sexual harassment—such as technology, entertainment, and finance—may be more affected than others.

Cautionary Tales Highlight Risk to Companies

In 2017, Susan Fowler, a former engineer at ride-hailing giant Uber Technologies Inc., brought down the company’s CEO with blog posts detailing the daily indignities against female employees, the sexual harassment she endured from her former manager, and the unwillingness of the human resources department to take action against a top performer. The resulting furor led then-U.S. Attorney General Eric Holder to investigate. His findings of a toxic, aggressive culture at Uber led to more than 20 firings and the resignation under pressure of the company’s CEO and co-founder, Travis Kalanick.

The example of Signet Jewelers is another cautionary tale. Allegations by 69,000 female employees silenced by Signet’s mandatory arbitration requirement was the inspiration for the introduced (but not passed) Ending Forced Arbitration of Sexual Harassment Act of 2017. Although then-current and former employees filed the class action complaint in 2008, including claims dating back to the late 1990s, it didn’t come to light publicly until 2017. The revelations caused Signet’s worst stock decline in eight years.

A subsequent two-pronged federal class action suit filed in 2016 in the Southern District of New York alleged the company misled investors about both the sexual harassment and its commitment to preventing harassment and discrimination in its workplace. Investors also alleged Signet misrepresented the health of its credit portfolio.

After repeated losses in court, the company and investors settled for $240 million in July 2020. Signet experienced an annual net loss of $15.21 million in 2021.

Internal Risk Assessments and Investigations

As companies begin to appreciate that sexual harassment and sexual assault have become significantly higher potential risks to corporate reputations and financial results, corporate executives will have to obtain a true assessment of the risks their company faces.

Audits conducted internally or by a company’s outside law or accounting firms can play an effective role in developing comprehensive policies and procedures, identifying weaknesses in compliance with policies and procedures, and establishing and maintaining channels for complaints. The new law may effectively force assessments to determine if there is an “inventory” of NDAs or new, undocumented potential liabilities.

Specific incidents or allegations of sexual assault or harassment will likely require an investigation. For reasons of impartiality and maintaining legal privilege, best practices strongly support that any investigation be conducted by an outside law firm (rather than by in-house counsel) that hasn’t previously been retained by the company. The existence of any prior business relationship might be seen to impair a firm’s ability to conduct a thorough and even-handed investigation, the results of which might adversely reflect on the company’s management.

The investigating law firm should be empowered to pursue the investigation wherever it might lead and not be hamstrung by a narrowly circumscribed mandate. Broad authority increases the chances that other, similar instances of harassment may be uncovered, along with their underlying facts and circumstances.

As in the case of Signet, there may be scores of similar incidents that occurred over many years, possibly much earlier—and in more company locations—than originally imagined. An effective mitigation effort depends upon a realistic assessment of the risk.

Prevention Measures and Culture Changes

Pressure from regulators, lawmakers, corporate and outside activists, and employees may also build, forcing companies to take more action to prevent sexual harassment, change corporate culture, and limit risk. The financial costs to victims and to the companies are significant. Steps to curtail harassment, and thereby reduce the risk to companies, might include a focus on diverse hiring, inclusion efforts, board of directors’ composition, and succession planning for key executives.

Corporate cultures that tolerate sexual harassment and sexual assault may plague many companies in corporate America. This problem has been particularly acute in male-dominated industries such as technology, finance, sports, and entertainment.

Gaming company Activision made the news last year for its pervasive harassment—popularly described as “frat boy” culture—and a walkout by many employees to protest workplace conditions outside company headquarters. A two-year investigation by the California Department of Fair Employment and Housing concluded that Activision’s leadership consistently failed to take steps to prevent discrimination, harassment, and retaliation.

Activision was also hit by a derivative shareholder suit and an action by the Equal Employment Opportunity Commission to pressure the company to change. The derivative litigation is ongoing, but the company has settled with the EEOC. As part of a deal with the agency to settle claims of sexual harassment, pregnancy discrimination, and retaliation against its female employees, the company agreed to improve its workplace culture and to create an $18 million fund for victims of sexual harassment and discrimination allegations.

Companies like Activision, Uber, Google (Alphabet), and others have taken some steps to improve their policies and change their corporate cultures.

After a public row in 2018 where thousands of Google employees walked out in protest of how the company had handled sexual misconduct claims against some of the company’s top executives, such as giving out large secret exit packages, Google said it changed some of its policies, including: making arbitration optional for individual sexual harassment and sexual assault claims; pledging more transparency in the internal claims process; and requiring more training to prevent unwanted sexual behavior. In January, Google said in an email to Bloomberg that developing a safer, more inclusive workplace is a top priority.

Time will tell how far corporations will go in practice to change their corporate culture. Increasing diversity hiring, establishing or expanding executive training and mentoring programs, diversifying corporate boards, and providing more transparency in how employees are assessed and promoted are actions likely to promote a more welcoming culture for an increasingly diverse workforce. More or better anti-harassment training for employees—particularly managers—would also help change the dynamic.

To succeed, most initiatives will require support from human resources departments. Many sexual harassment horror stories include tales of human resources personnel dismissing credible complaints, ignoring or failing to properly investigate complaints—especially against powerful or high revenue-generating employees—or meting out little or no punishment on the alleged harasser despite the accuser’s claims being substantiated. Changing corporate sexual harassment policies without improving how those policies are enforced is unlikely to prevent future claims in an environment where the financial and reputational risk has risen considerably.

Bloomberg Law is analyzing how the enactment of the new forced arbitration law affects lawyers in practice areas like employment, M&A, securities, and commercial law. Click here for the original article on the law’s passage, which will be updated toadd links to each follow-up analysis as it is published.

Bloomberg Law subscribers can also find related content on our Labor & Employment Practice Center, Securities Practice Center, and In-House Counsel Resources pages.

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