A recent case from the 7th circuit, Greengrass v. International Monetary Systems, Ltd., No. 13-2901, decided January 12, 2015, may be useful to keep in mind now that it’s 10-K season. The case involved a retaliation claim made by a former employee when her former employer, in describing in its 10-K her earlier EEOC discrimination claim against the company, identified her by name and asserted that her claim was “meritless.” The lower court dismissed her claim on a summary judgment motion, but the 7th Circuit, on de novo review, reversed and remanded for further proceedings: the plaintiff had “made out a prima facie case of retaliation by demonstrating that she engaged in a statutorily protected activity when she filed her EEOC charge, that [the company] engaged in an adverse employment action when it listed her name in its SEC filings, and that there was sufficient evidence for a rational trier of fact to find that [the company] listed her name because [she] filed the EEOC charge.” For securities lawyers, the case raises the issue of whether and how we describe employee litigation in periodic reports.
As you know, Item 103 of Reg S-K requires a company to describe material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the company is a party or of which any of its property is the subject. That description must include the name of the court or agency. the date instituted, the principal parties, a description of the factual basis alleged to underlie the proceeding, and the relief sought. While there is no precise definition of “material,” there are safe harbor exclusions for, among other things, damage claims that do not exceed 10% of consolidated current assets. (There are also loss contingency disclosure requirements under GAAP (ASC 450-20), which can require different and sometimes more extensive disclosure, but the Court does not discuss any GAAP requirements in the opinion, perhaps because the plaintiff was not identified in the notes to the financial statements.)
In this case, the plaintiff had several years previously filed with the EEOC a complaint against the company, alleging sex discrimination, national origin discrimination and retaliation. Shortly thereafter, she quit her job. Initially, the company did not disclose her complaint in its periodic reports but did mention another EEOC complaint, without naming that complainant. In fact, all of its 10-Qs in that year disclosed employee litigation without naming the employee-plaintiffs. After the EEOC began to make inquiry of the company regarding the plaintiff’s charge, the company decided to disclose her complaint in its 10-K and specifically named her, declaring its belief that the charges were meritless. (Other former employees with claims were also identified in the same filing.) The EEOC found the plaintiff and other females as a class had reasonable cause to proceed with their action, and the parties then settled the matter. The company reported the settlement of the plaintiff’s claims, but did not identify her by name.
The opinion indicates that the plaintiff then “struggled to find and maintain regular employment. [The plaintiff] attributes her [post-company] difficulties to the SEC filings that identified her by name. She claims that a Google search of her name draws multiple results regarding [the company’s] SEC filings that include her name. She also claims that a recruiter informed her she was ‘unemployable’ due to this information.” (Note that, in contrast to a complaint filed in court, EEOC charges are not readily available. As a result, an employer conducting a typical pre-employment background check would not learn of an EEOC charge without substantial effort, e.g., filing a FOIA request.)
She then filed a second EEOC complaint against the company, alleging retaliation because of her previous complaint, based on the company’s SEC filings. The EEOC again found “reasonable cause” to believe that her employer had violated the retaliation provisions of Title VII of the 1964 Civil Rights Act “by ‘providing information regarding her previous Charge of Discrimination on a public record to preclude her from obtaining new employment’” and issued a right-to-sue letter.
To prove retaliation using the “direct” method, according to the Court, a Title VII “plaintiff must prove (1) that she engaged in statutorily protected activity; (2) that she was subjected to an adverse employment action; and (3) that there was a causal connection between the two.” The Court said that there was “no dispute that [the plaintiff] satisfied the first element, as her formal EEOC charges were ‘the most obvious form of statutorily protected activity.’….We also find (and [the company] does not dispute) that listing [the plaintiff’s] name in publicly available SEC filings (and referring to her complaint as “meritless”) constituted a materially adverse employment action. As [her] allegations regarding the recruiter who called her ‘unemployable’ make clear, an employee’s decision to file an EEOC complaint might be negatively viewed by future employers.” To establish causation, the Court asserted, the plaintiff would need to show, either through admissions, or more likely, through circumstantial evidence, that the company “’would not have taken the adverse … action but for [her] protected activity.’”
The Court found that the plaintiff had “assembled a convincing array of circumstantial evidence.” This evidence included the “suspicious” timing of the company’s disclosure of her name — right after the EEOC began to seriously investigate her charge. The Court also contended that a reasonable jury could find “animus” against the plaintiff and disdain for the EEOC process in the email analysis from the GC to other management discussing how many of these similar claims the company should disclose in response to an EEOC request and in the CEO’s message to “[c]all me before you explode,” when forwarding the complaint to the alleged harasser. In addition, the Court found potential evidence of “pretext” through dissembling: the company’s “multiple shifts in policy—from not including litigants’ names, to listing them, and then not including them again—could lead a reasonable juror to find that [the company] is ‘dissembling’ when it contends that it listed the plaintiff’s name in response to advice regarding compliance with SEC regulations.” The credibility of the employer’s reasons was, the Court held, a question of fact for the jury.
Disclosure in SEC filings is usually considered to be protective in most cases, but disclosures regarding litigation can often be something of a mixed bag. For example, disclosures might result in indirectly revealing the company’s assessment of the viability of its own defense or the extent of potential loss, especially under the GAAP requirements. This particular case presents an instance where the disclosure itself triggered further claims because of the nature of the disclosure, the inconsistent presentation and the alleged harm inflicted on the plaintiff, which may or may not ultimately prove to have been retaliatory.
Reading this case, a public company might feel caught between Scylla and Charybdis: what to do if SEC rules require disclosure of the principal parties but the company could face charges of retaliation if it discloses the litigating employees’ identities? Once a case is determined by the company to be material under Item 103, as noted above, that Item requires disclosure of the principal parties, and it seems unfair to impose these consequences on a company that consistently complies with the mandate of the rule. The Court in this case appeared to place a lot of weight on the inconsistencies and the “suspicious” timing of the company’s disclosures, not to mention the incriminating email traffic from members of management. Describing her charges as “meritless” probably didn’t help either; stating instead that the company “denies the charges” or just indicating that the company intends to defend itself vigorously, without more, might have been more palatable.
If the company concludes that a case involving an employee is not material under Item 103, the company might determine that it should still be disclosed under general materiality principles or even on a purely voluntary basis. Neither disclosure would involve specific mandatory requirements, including naming the plaintiff, and, in determining whether to disclose the names of employee-plaintiffs, the company should take into account the risks associated with this case as well as the importance (or lack thereof) to investors of disclosing an employee-plaintiff’s identity. If disclosure is elected, the company should ensure consistency in the nature and extent of that disclosure.
Interestingly, among a number of companies, even for mandatory disclosure under Item 103, there appears to be a practice in class actions to describe the class but not to disclose named plaintiffs. Given the potential adverse consequences to employees resulting from public disclosure of their involvement in cases against their employers, perhaps the SEC might consider interpretive guidance that would allow omission of employee names in these cases. Certainly, from an investor standpoint, as in class actions, the generic description of “employee” or “former employee” would usually provide as much insight into the case as the actual name of the employee-plaintiff.
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