Daily Archives: February 21, 2011

Third Party Retaliation Claims under Title VII, the Discovery Rule under the NJLAD, and the Self-Critical Analysis Privilege under the FLSA

Employers conducting business in the New Jersey / New York markets should take note of several recent employment-related decisions. In Thompson v. North American Stainless, LP, 2011 U.S. LEXIS 913 (Jan. 24, 2011), the United States Supreme Court ruled that an employee who claimed he was fired because his fiancée filed a sex discrimination charge against their mutual employer could pursue a retaliation claim under Title VII of the Civil Rights of 1964. In Henry v. New Jersey Department of Human Services, 2010 N.J. LEXIS 1260 (Dec. 10, 2010), the New Jersey Supreme Court held that a terminated employee should have the opportunity to avail herself of the “discovery rule” and demonstrate that she acted reasonably in pursuing her discrimination claim in order to avoid a dismissal on statute of limitations grounds. In Craig v. Rite Aid Corporation, 2010 U.S. Dist. LEXIS 137773 (M.D. Pa. Dec. 29, 2010), discussed in the HR Tip of the Month, the Middle District of Pennsylvania declined to recognize the “self-critical analysis” privilege to protect a company’s voluntary internal assessment of its compliance with the Fair Labor Standards Act (FLSA), labor laws and existing bargaining agreements.

Thompson v. North American Stainless, LP

Eric Thompson and his fiancée were both employed by North American Stainless (NAS). Three weeks after being notified by the Equal Employment Opportunity Commission (EEOC) that Thompson’s fiancée had filed a charge of discrimination, NAS fired him. Thompson then filed a charge with the EEOC and later filed suit in federal court claiming that NAS fired him in order to retaliate against his fiancée.

The district court granted summary judgment to NAS, holding that Title VII did not permit third party retaliation claims. An en banc panel of the Sixth Circuit affirmed, concluding that because Thompson did not engage in any statutorily protected conduct, he was not included in the class of persons for whom Congress created a retaliation cause of action. The United States Supreme Court granted certiorari, and in an 8-0 decision, reversed the appellate panel.

The Court considered two questions: first, whether NAS’s firing of Thompson constituted unlawful retaliation; and second, did Title VII grant him a cause of action. The Court had little difficulty answering the first question in the affirmative, finding that if the facts alleged by Thompson were true, then his termination violated Title VII. Relying on past precedent, Justice Scalia, writing for the Court, observed that Title VII’s anti-retaliation provision, unlike the substantive provision, was not limited to discriminatory acts that affected the terms and conditions of employment. Rather, it prohibited any employer action that might dissuade a reasonable worker from making or supporting a charge of discrimination. The Court thought it obvious that a reasonable worker might be dissuaded from engaging in protected activity if she knew that her fiancé would be fired.

Regarding the second question, the Court addressed whether “aggrieved” under Title VII should be construed in a matter consistent with Article III standing, which requires only injury in fact caused by the defendant and remediable by the court. Justice Scalia concluded that “aggrieved” must be construed more narrowly. He also rejected the position advanced by NAS – that a “person aggrieved” refers only to the employee who engaged in protected activity. The Court adopted the “zone of interests” test, holding that “aggrieved” under Title VII enabled a suit by any plaintiff with an interest “‘arguably [sought] to be protected by the statutes.’” Applying that test, the Court concluded that Thompson fell within the zone of interests protected by Title VII, as (i) he was an employee of NAS, (ii) the purpose of Title VII was to protect employees from unlawful actions, and (iii) he was not an accidental victim of retaliation (but rather injuring him was NAS’s way of punishing his fiancée).

Henry v. New Jersey Department of Human Services

In April 2004, Lula Henry (Henry), who held a Master’s degree, was hired by Trenton State Psychiatric Hospital at an entry-level nursing position. In late Spring/early Summer 2004, Henry developed initial concerns that racial discrimination explained why she was hired at an entry level position, though her concerns were uncorroborated by any firm evidence. In late Summer 2004, Henry questioned her classification and requested reclassification; in response she remained assigned to her entry-level position. In November 2004, Henry resigned from Trenton State in order to take a position with another entity.

In the Spring of 2006, Henry was informed by a union representative that a Nigerian nurse had contested the placement of a less qualified Caucasian nurse and that there were widespread claims of racism at Trenton State. Henry also learned that a Caucasian nurse with similar credentials to hers was immediately hired into a higher job classification, contrary to what she was told about her placement. Henry claimed that prior to learning this information she had no factual basis to substantiate her earlier suspicions of race-based discrimination.

On July 24, 2007, Henry filed a complaint alleging racial discrimination in defendants’ hiring practice and retaliation in violation of the New Jersey Law Against Discrimination (NJLAD). Defendants moved for summary judgment based on the two-year statute of limitations applicable to NJLAD claims. The trial judge granted the motion, determining that Henry’s action accrued in 2004 and was not tolled by the discovery rule. The Appellate Division affirmed, and the Supreme Court granted certification. At issue was the impact of the “discovery rule” on NJLAD claims. That rule “delays the accrual of the action until the plaintiff ‘discovers, or by exercise of reasonable diligence and intelligence should have discovered, facts which form the basis of a cause of action.’”

Henry argued that her NJLAD claims did not accrue until 2006 because that is when she had some measure of corroboration of her concerns. Defendants argued that the discovery rule should not apply to NJLAD cases, but that even if it did, the rule would not be appropriate under the facts of this particular case.

The Court explained that the discovery rule is a well-established equitable doctrine that is applied when the statute of limitations would cause unnecessary harm without advancing its purpose. However, the Court did not find that there was an equitable basis on which to extend the statute of limitations on Henry’s retaliation claim, because that claim must have accrued at or before the date of her resignation in November 2004. As a result, the Court affirmed the Appellate Division’s dismissal of the retaliation claim.

The Court reached a different result on Henry’s discrimination claim. Noting its approval of the use of the discovery rule in LAD cases “when and where appropriate,” the Court held that this case might present such a circumstance. Henry had initial concerns in 2004 about her hiring and classification, but the reason she was given in response had nothing to do with racial discrimination. That, according to the Court, may have led her not to pursue the issue, thereby requiring the tolling of her cause of action. The Court held Henry was entitled to assert that she did not have reasonable suspicion of racial discrimination, even by the exercise of reasonable diligence, until 2006 when, among other things, she learned that less qualified Caucasian nurses were hired into advanced positions and she was told by her union representative about other claims of racial discrimination. Under these circumstances, the Court decided that Henry should get a hearing at which she could show that she acted reasonably in pursuing her claim of discrimination.

Delaware Chancery Court Provides Further Clarification as to When the “Entire Fairness” Standard of Review is Appropriate and How It Will Be Applied

On January 14, 2011, the Delaware Chancery Court issued an opinion in In re John Q. Hammons Hotels Shareholder Litigation that a merger transaction in which a controlling stockholder received consideration different than that received by the minority stockholders met the “entire fairness” standard. This opinion followed the Court’s determination in October 2009 that “entire fairness,” was the appropriate standard of review in this case.

Factual Background

The lawsuit arose following a going private transaction involving the merger of John Q. Hammons Hotels, Inc., a publicly traded Delaware corporation, with and into an unaffiliated third party. In early 2004, Mr. Hammons (the Chairman, CEO and controlling stockholder of JQH) informed the Board that he had begun discussions with third-parties regarding a potential sale of JQH or his interest in JQH. The Board thereafter formed a special committee of the Board to evaluate and negotiate a proposed transaction on behalf of the minority stockholders and to make a recommendation to the Board regarding any such transaction.

After nine months of negotiations and deliberations between potential acquirors and the special committee, the Board (without the vote of Hammons who recused himself from the Board vote) approved an offer from an unaffiliated third party for $24 per share for shares of Class A common stock. JQH stock had been trading at $4 – $7 per share prior to the rumors of the merger. Pursuant to the terms of the merger agreement, the merger was conditioned on a waivable requirement that the merger agreement be adopted by the affirmative vote of a majority of the shares of Class A common stock held by unaffiliated holders. At a duly held stockholder meeting, more than 72% of the outstanding shares of Class A common stock voted to adopt the merger agreement.

After the consummation of the merger, a group of minority Class A stockholders brought a class action suit against Hammons for, among other things, allegedly breaching his fiduciary duties by negotiating an array of private benefits for himself that were not shared with the minority stockholders.

Standard of Review/Ruling

In an earlier ruling, the Court determined that “entire fairness” is the proper standard of review for this transaction, and not the less onerous business judgment rule favored by the defendants. The Court noted that the business judgment rule would have been appropriate but for certain procedural deficiencies in the approval of the transaction. The Court stated that in a case where the controlling stockholder and the majority are in a sense “competing” for portions of the consideration, there must be “robust procedural protections in place to ensure that the minority stockholders have sufficient bargaining power.”

The Court ruled that the business judgment rule would have applied if the merger was (1) recommended by a disinterested and independent special committee of the board and (2) approved by a majority of all minority stockholders by a vote that is not waivable. In Hammons, the transaction was approved by a majority of the minority of stockholders voting on the matter, but such vote could have been waived by the special committee.

On the first factor of the “entire fairness” analysis, i.e., “fair dealing”, the Court based its opinion on the following factors:

  1. the special committee that negotiated and approved the transaction satisfied the threshold requirements for independence (e.g., it retained independent and skilled legal and financial advisors, held dozens of meetings over the 9 month period leading up to the merger and negotiated with several interested parties, all resulting in a transaction in which the unaffiliated Class A stockholders ultimately received $24 per share, an 85% increase over the initial offer);
  2. members of the special committee were highly qualified and had extensive experience in the hotel industry;
  3. members of the special committee understood their authority and duty to reject any offer that was not fair to the unaffiliated stockholders as evidenced by their rejection of the initial offer from a separate third party;
  4. evidence at trial demonstrated that the members of the special committee were thorough, deliberate and negotiated at arm’s length with both competing potential acquirors over a nine month period to achieve the best deal for the minority stockholders.

Moreover, as to the plaintiffs’ claim that Hammons coerced or strong-armed the special committee, the Court noted that the plaintiffs provided no credible evidence at trial demonstrating any improper conduct on the part of Hammons and stated that “plaintiffs have not come close to showing the Merger resulted from an unfair process.”

On the second factor of the “entire fairness” review, i.e., “fair price”, the Court analyzed the testimony made by the valuation experts from both sides. Ultimately, the Court found the defendants’ valuation expert to be more credible, believable and well-reasoned.

Finally, as to the issue of whether Hammons breached a fiduciary duty to the minority stockholders, the Court found that because he did not participate in the approval of the merger as a director, he was not on both sides of the merger, he did not make an offer as a controlling stockholder and he did not engage in any conduct that adversely affected the merger consideration obtained by the unaffiliated minority stockholders, he did not breach any fiduciary duties to the minority stockholders.

For companies with controlling stockholders that engage in M&A transactions, this case illustrates the importance of establishing an independent and disinterested special committee of the board and giving the committee the power to negotiate the transaction.  In addition, potential targets should note the importance of procedural safeguards in approving transactions, such as a non-waivable vote of a majority of all of the minority stockholders. Such safeguards will help boards of directors preserve the protections afforded by the business judgment rule and help to avoid challenges to their decisions by disgruntled stockholders.