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AUGUST 2018

IN THIS ISSUE S P OT LI G H T: T H E # M E T O O PA R A D I G M

D E E P D I V E  Li a b i l i t y a n d i n s u r a n c e c o n c e r n s

Managing D&O liability in the new corporate landscape

C PA H A Z A R D S   L a w ye r s w e i g h i n o n c o m m o n

T O P 5  R u n n i n g d e s t i n a t i o n s a l o n g t h e w a t e r,

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AUGUST 2018

EDITORS

CONTRIBUTORS

Jonathan S. Ziss

Jason A. Botticelli jbotticelli@goldbergsegalla.com

Management and Professional Liability Practice Group Chair

267.519.6820 jziss@goldbergsegalla.com

Court Cousins ccousins@goldbergsegalla.com

Peter J. Biging

Anthony J. Golowski II agolowski@goldbergsegalla.com

Management and Professional Liability Practice Group Vice Chair

646.292.8711 pbiging@goldbergsegalla.com

Todd D. Kremin tkremin@goldbergsegalla.com Latha Raghavan lraghavan@goldbergsegalla.com Heather M. Zimmer hzimmer@goldbergsegalla.com


PLM | AUGUST 2018 INSIGHT 4  |  How Lawyers Perceive CPA Hazards Tips and tricks to help reduce the risk of a lawsuit or minimize potential liability. 6  |  Miscellaneous Professional Liability: A Deep Dive Understanding the above-water legal risks faced by scuba professionals. SPOTLIGHT 8  |  The #MeToo Paradigm In this new era, corporate America must seriously consider the risks presented by sexual harassment by corporate officers and directors — and what needs to be done to manage this risk. TOP 5 13  |  Running Destinations Along the Water Beat the heat, clear your head, and plan your next motion on these paths across the GS office footprint. CASE NOTES 14  |  Not Easy in Massachusetts to Hold an Insurance Broker Liable Based on a "Special Relationship" With Its Insured Although often asserted, claims against insurance brokers based on a special relationship are difficult to win.


INSIGHT

How Lawyers Perceive CPA Hazards Jonathan S. Ziss This article originally appeared in the Summer 2018 edition of the Pennsylvania CPA Journal, published by the Pennsylvania Institute of Certified Public Accountants (PICPA). Reprinted with permission. I was recently at a gathering of lawyers who spend a lot of time defending CPAs in professional liability matters. As we shared our thoughts as to where the trouble is coming from these days, I thought that it made sense to share these observations from a highly specialized resource with the PICPA community. TAX PREPARERS When penalties and interest are assessed, taxpayers sometimes seek relief by asserting that they had reasonable cause and acted in good faith, both of which tie back to reliance on the professional advice of their tax preparer. These submissions are often drafted by the taxpayer in collaboration with the tax preparer – if not wholly drafted by the preparer. It creates a situation in which the preparer falls on his sword, so to speak. Should the subsequent outcome not satisfy the client, a liability claim might be asserted in which the client seeks damages. Having already fallen on the sword, the preparer will be hard-pressed to muster a defense. More problematic: insurance coverage may have been spoiled by admitting fault. There is a way to handle these situations so that the interests of both the taxpayer and the preparer are protected. The preparer can reach an agreement with the client that a statement may be used for mitigation only, and cannot be used for any other purpose (such as impeachment in a liability case). A limited-use agreement can be easily put in place, and it takes nothing away from the intent to establish reasonable cause. Another bit of risky business that attorneys discuss in the area of tax work includes insufficient communication between the practitioner and counsel for the estate of a high-net-worth decedent, for whom an IRS Form 706 return may have to be prepared. Determinations as to whether the estate qualifies and, if so, who will prepare the return (within the allotted time), require clear communication. Too often, silence on these matters, plus the passage of critical time, sets up a bad situation for the CPA, the executors, and estate counsel. For those who have clients who rely on intermediaries to communicate for them – say, an executive assistant — make sure that your engagement letter calls out this arrangement so that the client cannot disavow his or her responsibility under Circular 230 or otherwise.

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AUDIT AND ATTEST WORK Identifying a reportable condition and documenting it in a management comment letter is strong medicine. Don’t be hesitant to prescribe it for the health of your client and for your own protection. When asked to sit in on a conference call with a bank or to accompany a client to a meeting during which its financial condition will be discussed, consider the big picture. What is your role? Do you plan to answer questions to benefit your client? Will you be providing information to give comfort to the lender? Comfort appearances, like comfort letters, can open the door to third-party liability exposure. Bear in mind that a simple client courtesy such as this could have serious repercussions. One often hears that the Public Company Accounting Oversight Board (PCAOB) is especially wary of anybody other than large firms who audit public company registrants. If you do this work, be sure to have the depth and expertise to meet the challenge, and be sure that your work papers reflect your thoughtful planning, preparation, and execution. CYBERSECURITY The CPA community on the whole is tech savvy, but it’s getting crazy out there in cyberspace. There is a trained workforce of cybercriminals working three shifts per day to evade or pierce firewalls, delude and deceive unwitting staff, and hijack or kidnap data. Accounting firms seem to be a favored target. You want to keep up your defenses. Visit IRS.gov, FTC.gov, AICPA.org, and, of course, PICPA.org. Each of these websites delivers a wealth of easy-to-understand information that you can use to stay ahead of the bad guys and to react appropriately to an adverse event. ALL ENGAGEMENTS Know who your client is. That sounds almost silly, right? But ask yourself whether your client is the company or its officer(s). Will you be working for the aged and diminished family patriarch or his noisiest and nosiest son or daughter? The husband, the wife, the couple? A majority bloc of partners or the company? You get the picture. It may seem to be a question that doesn’t need to be asked. But when you realize that it does, it may already be too late. You don’t want to find yourself in a conflict of interest. Asking who the client is — and continuing to ask this question — is good professional hygiene.  


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Miscellaneous Professional Liability: A Deep Dive Understanding the above-water legal risks faced by scuba professionals Jason A. Botticelli

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INSIGHT

A

Policies protecting “miscellaneous” profess dive professionals we have to sionals are among the fastest-growing in maintain liability insurance in case the realm of professional liability. Scuba dive we are ever sued in relation to a dive leaders are excellent examples of the types accident we are associated with. Most of of service providers protected by miscella- us pay our premium, receive the certificate neous professional liability (MPL) policies. of insurance, and then don’t worry about it until next year. We are comfortable that Goldberg Segalla toxic tort lawyer — and the insurance is in place and we have some accomplished divemaster — Jason Botticelli protection. However, with some contemauthored this piece for the Training section plation about just what it is the insurance of Sport Diver to educate other scuba diving is protecting us from, we can have a better leaders about the potential liability they face understanding about what our obligations when escorting other divers into the depths. are and, in turn, become better divers and Those who insure or represent wetsuit-clad dive leaders. pros, dive shops, and dive boats will benefit from understanding these risks from their cli- NEGLIGENCE ents’ point of view. Our professional liability insurance is to Reprinted with permission.

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reasonable. The attorney for the dive leader, who is now a defendant in the case, will do their best to show the dive leader acted reasonably, which in this scenario might be a high hill to climb. For there to be negligence there needs to be four things: (1) duty, (2) breach, (3) proximate cause, and (4) injury. In the above example, there is a “duty.” It’s the duty of the dive leader to lead a safe dive; this includes determining if conditions are too bad to dive for that day. The “breach” of the duty would be the dive leader ignoring the higher-than-usual waves and the basic training level of the divers under their care and going on with the dive. For parts (3) and (4) the “injury” has to be “proximately caused” by the dive leader’s breach of duty. For example if the injured diver was swept under and hit by the dive boat, that would be proximately related to the dive leader’s decision to dive in the higher waves. If the injured diver was hurt by fire coral, this most likely would not be found to be as a proximate cause of the dive leader’s breach. (So under that scenario the dive leader would not be negligent since the breached duty did not proximately cause the injury).

help protect us if we are sued because someone is claiming we were negligent in our duties in relation to a dive accident. But what exactly is negligence? According to Black’s Law Dictionary it is “The omission to do something which a reasonable man, guided by those ordinary considerations which ordinarily regulate human affairs, would do, or the doing of something which a reasonable and prudent man would not do.” In a simplified dive leader context, it means failing to do something a normal reasonable dive leader would do Negligence very much depends on the or doing something that a normal reason- surrounding facts. If the same dive leader able dive leader would not do. is leading training for an underwater recovery unit, the decision to dive in the higher To get to the professional diver level we all waves may not be a breach of duty. These have undergone extensive training, both divers are specialized and need to train in in and out of the classroom and water. adverse conditions since they are usually We have the tools necessary to make “rea- faced with adverse conditions. They would sonable” decisions with leading a dive. It’s be ill-prepared for such conditions if they when we think that the normal rules don’t only dove in the calmest of water and apply or it will be ok if just this once we weather. If an underwater recovery unit don’t follow the normal procedure that leader did only train their team in calm, trouble occurs. The training and knowl- warm waters, they would probably be edge is there, we just need to acknowledge negligent if one of the divers was hurt in a and follow it. When making a dive decision rescue attempt. Here, the duty was to prekeep in mind what would the reasonable pare the divers for incidents that normally prudent diver do. For example, if the waves happen in the worst of conditions. are much higher than normal and you have a boat full of newly open-water–certi- The takeaway is that every dive situation fied divers, the reasonable prudent course is unique. If an incident occurs, it is how of action would be to call the dive and re- the diver leader prepared for and reacted schedule. If the dive leader took the new- to the situation that will dictate whether or bies out in those conditions and someone not the incident and any resulting injury was hurt, a lawsuit would most likely fol- was due to negligence. Keeping the above low. The attorney for the injured party, or in mind for every dive will keep divers out plaintiff, would argue that the dive leader’s of court and in the water, where we would actions under the circumstances were not all prefer to be.  

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SPOTLIGHT

The #MeToo Paradigm In this new era, corporate America must seriously consider the risks presented by sexual harassment by corporate officers and directors — and what needs to be done to manage this risk. insulating individuals perceived to be key performers rather than placing the focus on refusing to tolerate and taking aggressive action towards eradicating such behavior, has revealed a corrosive culture that society at large seems unwilling to tolerate going forward. Where ugly allegations might previously have been quietly addressed, settlement agreements drawn up, and the individuals accused of such conduct permitted to proceed in their leadership Peter J. Biging, Heather M. Zimmer & Todd D. Kremin positions as if nothing had happened — with the excuse being that the individual’s value to the company justified dealing with This article originally appeared in the American Bar Association Tort the allegations in this manner — the revelation of the depth of the Trial and Insurance Practice Section Committee on Professional ugliness being concealed and enabled has made this impossible Liability Insurance Spring 2018 newsletter. to justify going forward.

T

he #metoo movement has dawned a new era for corporate America with regard to how we look at and what we do in response to allegations of sexual harassment. It has at the same time forced corporate America to give serious consideration to the manner in which to consider the risks presented by sexual harassment by corporate officers and directors, and what needs to be done to manage this risk.

This has had a dynamic impact, the reverberations from which are only just beginning to be felt. In reaction to the veil being lifted, investors are now suing companies and their boards for the manner in which they have handled allegations of sexual harassment by corporate leadership, and the impact their conduct may have on the company’s bottom line insofar as it could be perceived to have been enabling of such behavior. The number of individual, derivative, and class action lawsuits based on this While complaints of sexual harassment at work are not new, the conduct is on the rise, prosecutors are investigating the criminal revelation that a head of a film studio could not only be permitted ramifications from these allegations, and brands are being irrepto pursue a decades-long career as a sexual predator but, in fact, arably tarnished. be enabled by corporate leadership to engage in such behavior, has been met with a collective sense of horror. The practice of How do companies and their boards deal with this new paradigm? journalistic “catch and kill” to bury claims of sexual misconduct How do they identify the risks and take the necessary steps to proand grossly inappropriate behavior has drawn scrutiny, as well. tect against them? This article will provide an overview of the new And the spotlight shown on the manner in which corporations landscape to be navigated, discuss the issues presented, and offer have placed a premium on “managing” the immediate financial a roadmap for how to deal with these issues going forward. risk presented by the claims and fallout from the allegations, and

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RISE IN SEXUAL HARASSMENT ALLEGATIONS

WHAT IS SEXUAL HARASSMENT AND WHAT ARE THE RISKS PRESENTED?

For years, companies and their boards were able to quietly settle and then sweep sexual harassment allegations under the rug, as there was little financial incentive to address them in a more fulsome manner.1 Times have changed. While a company’s stock price may not necessarily be impacted when allegations of sexual harassment first surface,2 it nonetheless has to be taken into consideration that a serious financial risk can be presented when a company does not deal with claims promptly, directly, and in a manner which evidences a corporate culture that simply will not tolerate such behavior. An illustrative example can be seen in what happened when the model Kate Upton accused the Guess, Co. co-founder of sexual harassment and, shortly thereafter, the company’s shares dropped nearly 18 percent, shedding roughly $250 million in value.3 As another example, Twenty-first Century Fox paid out an eight-digit settlement in 2016 for its mishandling of sexual harassment claims against Roger Ailes and Bill O’Reilly.4 Still another cautionary tale is being told in how the market is reacting to the lawsuits against Steve Wynn, Wynn Resorts, and his board of directors concerning Wynn’s alleged decades-long sexual misconduct.5 In the aftermath of these suits, the stock price of Wynn Resorts dipped nearly 20 percent.6 And the most telling example is Weinstein & Co., where an entire brand has been eviscerated by the revelations of Weinstein’s enduring sexual misconduct and the failures of the Weinstein board to take effective measures to put a stop to it.

The Equal Employment Opportunity Commission defines “sexual harassment” as “unwelcome sexual advances, requests for sexual favors, and other verbal or physical harassment of a sexual nature.”7 It is defined similarly in many state and city statutes.8 Sexual harassment does not have to be of a sexual nature for it to be unlawful; instead, sexual harassment extends to offensive comments about a person’s gender.9 While sexual harassment claims were until recently largely risk-specific to the claimant, manageable through employment practices liability insurance (EPLI) coverage, and not likely to present a potential for risk in the form of securities fraud and/or shareholders derivative litigation, there have been a number of claims of recent vintage which should put every corporate leader on notice that these types of claims, and how they are handled, can pose such risks today, and in a very substantial way. These claims have been largely premised on two theories of liability: 1) violations of the Securities Exchange Act of 1934 (the “Exchange Act”); and 2) breach of fiduciary duty claims. CLAIMS UNDER THE EXCHANGE ACT A plaintiff may bring an action against a public company for violations of the antifraud provisions of the Exchange Act, via the private right of action authorized pursuant to Sections 10(b) and 20(a) of the Exchange Act. The claims being brought under the Exchange Act arising from how a corporation has addressed complaints of sexual harassment generally have cen-

tered on a company’s duty to disclose and report the claims and risks presented thereby in its public filings made to the Securities Exchange Commission (SEC), such as through 10-k and 10-q filings. Under Rule 10b-5, it is unlawful for a public corporation to make any untrue statements or omissions of a “material fact” that would render any statement made to the SEC “misleading.”10 Under Item 103 of Regulation S-K of the Securities Act of 1933, a public corporation also has an affirmative duty to disclose “any material legal proceedings” that are pending against it before a court or agency, or “any proceedings known to be contemplated by governmental authorities.”11 Additionally, under Item 303 of Regulation S-K, a company must disclose any “known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”12 The Second Circuit has held that a company is required to disclose statements from Item 303 pursuant to Section 10(b) filings.13 The private right of action under Section 10(b) of the Securities Exchange Act can be implicated in the sexual harassment context when a company makes statements to the SEC concerning its board’s integrity, success, or any investigations that are ongoing, which is the basis for one of the current suits against Steve Wynn, Wynn Resorts, and its various officers.14 In the class action that was brought in that matter, investors have alleged violations of Section 10(b) and 20(a) based on the

1  An excellent discussion of some of these cases can be found in Daniel Hemel & Dorothy S. Lund, Sexual Harassment and Corporate Law, Colum. L. Rev. (forthcoming 2018). 2  See Ryan Vlastelica, Why the Wave of Sexual Harassment Allegations Won’t Have an Impact on Stock Prices, Market Watch (Dec. 15, 2017), https://www.marketwatch.com/story/why-the-wave-ofsexual-harassment-allegations-wont-have-an-impact-on-stock-prices-2017-12-15. 3  SEE SAMANTHA COONEY, COMPANIES ARE LOSING MILLIONS AFTER #METOO ALLEGATIONS LIKE KATE UPTON’S CLAIM AGAINST GUESS’ PAUL MARCIANO, TIME (FEB. 2, 2018), HTTP://TIME. COM/5130340/KATE-UPTON-GUESS-STOCK-PRICE/. 4  See Jonathan Stempel, 21st Century Fox in $90 million settlement tied to sexual harassment scandal, Reuters (Nov. 20, 2017), https://www.reuters.com/article/us-fox-settlement/21st-centuryfox-in-90-million-settlement-tied-to-sexual-harassment-scandal-idUSKBN1DK2NI. 5  See Complaint, Ferris et al. v. Wynn Resorts Ltd., et al. (S.D.N.Y. Feb. 20, 2018), No. 18-cv-01549, 2018 WL 1023165; Complaint, Norfolk County Retirement System v. Wynn et al. (Nev. D.C. Clark County Feb. 6, 2018, No. A-18-769062-B, 2018 WL 770483). 6  See Complaint, Ferris et al. v. Wynn Resorts Ltd., et al. (S.D.N.Y. Feb. 20, 2018), No. 18-cv-01549, 2018 WL 1023165; Complaint, Norfolk County Retirement System v. Wynn et al. (Nev. D.C. Clark County Feb. 6, 2018, No. A-18-769062-B, 2018 WL 770483). 7  U.S. Equal Employment Opportunity Commission, Sexual Harassment, https://www.eeoc.gov/laws/types/sexual_harassment.cfm (last visited Apr. 24, 3018). 8  See, e.g., California: Fair Employment and Housing Act, West’s Ann. Cal. Gov. Code § 12940 (“For purposes of this subdivision, ‘harassment’ because of sex includes sexual harassment, gender harassment, and harassment based on pregnancy, childbirth, or related medical conditions. Sexually harassing conduct need not be motivated by sexual desire.”); see also Taylor v. Nabors Drilling USA, LP, 166 Cal.Rptr.3d 676, 683 (Cal. App. 2 Dist. 2014) (“[P]rohibited harassment includes ‘verbal, physical, and visual harassment, as well as unwanted sexual advances.’”); New York: N.Y. Executive Law § 296 (2017); New York City, N.Y., Code §§ 8-502, 8-602 (2018); Eric T. Schneiderman, Sexual Harassment In The Workplace: Know Your Rights, New York State Attorney General, https://ag.ny.gov/ sites/default/files/sexual_harrassment_brochure.pdf (last visited Apr. 24, 2018); see also Walsh v. Covenant House, 664 N.Y.S.2d 282, 283, 244 A.D.2d 214, 215 (N.Y. 1st Dep’t 1997) (“The State and City Human Rights Laws apply the same Federal standards for determining quid pro quo and hostile environment sexual harassment claims, and differ only in that the City law allows for the recovery of punitive damages.”). 9  See supra, fn 9. 10  17 CFR 240.10b-5 (2018). 11  17 CFR 229.103 (2018). 12  17 CFR 229.303 (2018). 13  Compare Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d. Cir 2015) (“Item 303’s affirmative duty to disclose in Form 10—Qs can serve as the basis for a securities fraud claim under Section 10(b).”) with Ash v. PowerSecure Intern., Inc., No. 14 Civ. 92, 2015 WL 5444741, at *11 (E.D.N.C. Sept. 15, 2015) (“[A] violation of SK—303’s reporting requirements does not automatically give rise to a material omission under Rule 10b—5”). 14  See Complaint, Ferris et al. v. Wynn Resorts Ltd., et al. (S.D.N.Y. Feb. 20, 2018), No. 18-cv-01549, 2018 WL 1023165.

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August 2018 | 9


board’s alleged failure to disclose the CEO’s “pattern of sexual misconduct” in light of the alleged false statements it previously made to the SEC that any reported violations of the company’s “code of conduct” would be “taken seriously and promptly investigated.”15 The plaintiffs allege that the company was under a duty to disclose the alleged “rampant sexual misconduct” by Wynn that has since been made public, and the ensuing arbitration against the company and its CEO.16 Similarly, last year, shareholders sued Signet Jewelers, which sells jewelry through Kay and Zales Jewelry, and its CEO, Mark Light, for violations of the antifraud provisions of Sections 10(b) and 20(a) of the Exchange Act.17 The lawsuit in that case alleges that the company failed to disclose a nearly decade-old arbitration involving claims by approximately 69,000 female employees who had alleged a corporate culture of sexual harassment and discrimination that included a number of executives, including Light.18 Based thereon, the plaintiffs have alleged violations of Section 10(b) and Rule 10b-5 as a result of, among other things, the board’s failure to properly disclose the harassment and for making misleading statements and omissions “that caused the price of Signet common stock to be artificially inflated during the Class Period.” A month before the plaintiffs filed their complaint, the Washington Post published an article detailing the sexual harassment claims.19 While Light is not nearly as synonymous with the Signet brand as Harvey Weinstein is with Weinstein & Co. or Stephen Wynn is with Wynn Resorts, the Signet brand name was damaged by the news of the sexual harass-

ment claims and his alleged participation in activity by “top male managers” including “dispatch[ing] scouting parties to stores to find female employees they wanted to sleep with, laugh[ing] about women’s bodies in the workplace, and push[ing] female subordinates into sex by pledging better jobs, higher pay or protection from punishment,” which plaintiffs alleged caused the company’s stock to fall nearly 13 percent and its common stock price to fall 58 percent from its class period high.20

ment, officers and directors can breach their duties by sexually harassing employees (and, in so doing, intentionally acting with a purpose other than that of advancing the best interests of the corporation) or failing to monitor or investigate known sexual harassment claims.23 An example of an application of such a derivative action can be found in the suit filed by the shareholders of Wynn Resorts, who allege that the board, and its CEO, breached their fiduciary duties by failing to effectively exercise oversight over Wynn Resorts and its CEO by “failing to police, investigate and act… to address the known credible allegations of intentional egregious misconduct and violations of law by Mr. Wynn involving Wynn Resorts.”24 The derivative complaint details the board’s alleged knowledge of decades-long sexual harassment by Mr. Wynn (which allegedly included on numerous occasions instructing a massage therapist employed at Wynn’s Las Vegas spa to touch his genitals), including the board’s specific knowledge of an alleged rape by Mr. Wynn culminating in a $7.5 million settlement paid to the victim (which had been specifically brought to the attention of the board by Wynn’s exwife).25 Mr. Wynn resigned as CEO shortly after the Wall Street Journal published an article about his alleged rampant sexual misconduct.26

The private right of action under Section 10(b) of the Securities Exchange Act can be implicated in the sexual harassment context when a company makes statements to the SEC concerning its board’s integrity, success, or any investigations that are ongoing SHAREHOLDER DERIVATIVE ACTIONS Every officer and director of a company owes its company, and shareholders, fiduciary duties of care and loyalty, which if violated, can subject them to a derivative action for breach of same.21 A shareholder who brings a derivative action must either make a demand on the directors to bring a litigation or set forth particularized factual allegations in a complaint that such demand on the board would be futile by raising a reasonable doubt that either: 1) the directors are disinterested and independent, or 2) that the board’s decision was not a valid exercise of business judgment.22 In the context of sexual harass-

Similarly, in 2016, stockholders of Twentyfirst Century Fox alleged that their board of directors failed to properly exercise oversight over Fox’s workplace and thereby permitted a hostile workplace plagued by “rampant sexual harassment and exploitation,” including sexual harassment

15  Id. 16  Id. 17  See Complaint, Irving Firemen’s Relief and Retirement Fund v. Signet Jewelers (N.D. Tex. Mar. 28, 2017) (No. 3:17-cv-00875-D), 2017 WL 1224342. 18  Id. 19  Drew Harwell, Hundreds allege sex harassment, discrimination at Kay and Jared jewelry company, Washington Post (Feb. 27, 2018), https://www.washingtonpost.com/business/economy/ hundreds-allege-sex-harassment-discrimination-at-kay-and-jared-jewelry-company/2017/02/27/8dcc9574-f6b7-11e6-bf01-d47f8cf9b643_story.html?noredirect=on&utm_term=.a743c25f1f3f; Lauren Thomas, This Jewelry Brand’s Stock Plummets After Sexual Harassment Allegations Surface, CNBC (Feb. 28, 2017), https://www.cnbc.com/2017/02/28/signet-jewelers-stock-drops-as-sexualharassment-allegations-surface.html. 20  See Complaint, Irving Firemen’s Relief and Retirement Fund v. Signet Jewelers (N.D. Tex. Mar. 28, 2017) (No. 3:17-cv-00875-D), 2017 WL 1224342; see also Harwell, supra note 20. 21  18 Am. Jur. 2d Corporations § 1441 (2018). 22  See Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984); White v. Panic, 783 A.2d 543, 551 (Del. Sup. 2001). 23  See, e.g., Complaint, Norfolk County Retirement System v. Wynn et al. (Nev. D.C. Clark County Feb. 6, 2018, No. A-18-769062-B, 2018 WL 770483); White v. Panic, 783 A.2d 543 (Del. Sup. 2001); In re American Apparel, Inc. 2014 Derivative Shareholder Litigation, No. 14 Civ. 5230, 2015 WL 12724070, at *17 (C.D.Cal. 2015). 24  Complaint, Norfolk County Retirement System v. Wynn et al. (Nev. D.C. Clark County Feb. 6, 2018, No. A-18-769062-B, 2018 WL 770483). 25  Id. 26  See Scott Neuman, Steve Wynn Resigns As Head Of Wynn Resorts Amid Sexual Misconduct Allegations, NPR (Feb. 7, 2018), https://www.npr.org/sections/thetwo-way/2018/02/07/583895338/ steve-wynn-resigns-as-head-of-wynn-resorts-amid-sexual-misconduct-allegations; Alexandra Berzon, Chris Kirkham, Elizabeth Bernstein, & Kate O’Keeffe, Dozens of People Recount Pattern of Sexual Misconduct by Las Vegas Mogul Steve Wynn, The Wall Street Journal (Jan. 27, 2018), https://www.wsj.com/articles/dozens-of-people-recount-pattern-of-sexual-misconduct-by-las-vegas-mogulsteve-wynn-1516985953.

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from being informed of risks or problems requiring their attention.”31 Directors may be liable under a Caremark theory where “red flags” are “waived in one’s face or displayed so that they are visible to the careful observer.”32 Because sexual harassment often involves surreptitious conduct, this can make a breach of fiduciary duty claim for failure to monitor and exercise oversight challenging. Nonetheless, where evidence of a systemic failure by the board to address a pattern of sexual harassment involving various red flags of misconduct that the board fails to address can be shown, such a claim may have legs.

This challenging past history notwithstanding, it appears that the tide may be about to turn.

by Ailes for at least a decade.27 With damage claims based on, among other things, the payment of tens of millions of dollars paid to settle Bill O’Reilly’s alleged sexual harassment, a drop in advertising revenue and ratings, and the “loss of high profile talent,” Fox quickly settled the claims for $90 million.28 OBSTACLES IN A DERIVATIVE ACTION While it is fairly straightforward to argue that a director or officer will have breached his/her fiduciary duties to the shareholders by personally engaging in sexual harassment of the company’s employees and/ or participating in and fostering a culture of sexual harassment and discrimination,

it can be challenging for a derivative plaintiff to maintain a breach of fiduciary duty claim for a failure to monitor and exercise oversight, which is referred to as a Caremark claim.29 In order to allege a breach under Caremark, a plaintiff must meet the high burden of showing a “sustained or systemic failure of the board to exercise oversight — such as an utter failure to attempt to assure a reasonable information and report system.”30 To do this, plaintiffs must show: “(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, [they] consciously failed to monitor or oversee its operations thus disabling themselves

In the past, plaintiffs were unsuccessful in efforts to pursue shareholder derivative suits arising out of alleged sexual harassment based on a Caremark theory of liability.33 As a recent example, shareholders of American Apparel brought suit against the company, several directors, and the CEO in 2010 and then again in 2014 alleging that the board breached their fiduciary duties with regards to the CEO’s sexual harassment.34 A California district court dismissed the 2010 complaint, holding that bare allegations of the CEO’s sexual tendencies could not meet the high threshold imposed by Caremark.35 As more sexual harassment allegations arose, shareholders of American Apparel brought suit again in 2014.36 Yet again, however, the court concluded that plaintiffs had failed to show that the American Apparel board (continued on next page)

27  See Complaint, City of Monroe Employees’ Ret. Sys. v. Murdoch, et al. (Del. Ch. Nov. 20, 2017), No. 2017-0833. 28  Id.; see also Jonathan Stempel, 21st Century Fox in $90 million settlement tied to sexual harassment scandal, Reuters (Nov. 20, 2017), https://www.reuters.com/article/us-fox-settlement/21st-century-fox-in-90-million-settlement-tied-to-sexual-harassment-scandal-idUSKBN1DK2NI. 29  See, e.g., White v. Panic, 783 A.2d 543 (Del. Sup. 2001); In re American Apparel, Inc. 2014 Derivative Shareholder Litigation, 2015 WL 12724070, at *17 (C.D.Cal., 2015). 30  In re Caremark International Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996); see also In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 123 (Del. Ch. 2009) (“[T]o establish oversight liability a plaintiff must show that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as by failing to act in the face of a known duty to act.”). 31  In re American Apparel, Inc. 2014 Derivative Shareholder Litigation, 2015 WL 12724070, at *17 (C.D.Cal., 2015) quoting Stone v. Ritter, 911 A.3d 362, 370 (Del. 2006) 32  Rattner v. Bidzos, No. Civ.A. 19700, 2003 WL 22284323 at *13 (Del. Ch. 2003), quoting In re Citigroup Inc. S’holders Litig., 2003 WL 21384599, at *2 (Del. Ch. June 5, 2003). 33  In re American Apparel, Inc. 2014 Derivative Shareholder Litigation, No. CV-14-05230-MWF (JEMx), 2015 WL 12724070, at *17 (C.D. Cal., 2015); White v. Panic, 783 A.2d 543 (Del. Sup. 2001); In re American Apparel, Inc. Shareholder Derivative Litigation, 2012 WL 9506072, at *29. 34  In re American Apparel, Inc. Shareholder Derivative Litigation, 2012 WL 9506072, at *29; In re American Apparel, Inc. 2014 Derivative Shareholder Litigation, 2015 WL 12724070, at *17. 35  In re American Apparel, Inc. Shareholder Derivative Litigation, 2012 WL 9506072, at *29. 36  In re American Apparel, Inc. 2014 Derivative Shareholder Litigation, 2015 WL 12724070, at *19.

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August 2018 | 11


demonstrated a conscious disregard for their responsibilities when they “eventually did investigate, then suspended, and ultimately terminated [the CEO].”37 This challenging past history notwithstanding, it appears that the tide may be about to turn. Allegations involving a lengthy history of sexual harassment over many years, and knowledge by the corporate boards of directors of their companies of this conduct, coupled with conduct arguably designed to conceal and enable this behavior as much as attempt to provide recompense to the victims and avoid negative publicity, could prove to be sufficient to meet this standard.

plaint, filed on March 23, 2018, alleging that not only did the board fail to act “in the face of known and credible allegations” but that they “intentionally and knowingly breached their fiduciary duties by failing to implement internal controls that would alert them to the hostile work environment created by Steve Wynn’s widespread sexual harassment and abuse, which was repeatedly reported to senior Company Officials” since at least 2005, and concealed his sexual misconduct from the stockholders by repeatedly misrepresenting the company’s corporate governance framework.39 Based on these allegations, it appears the plaintiffs may have enough to meet the Caremark standard in this instance.40

ter being fired for such conduct in September 2017, “disloyally wield[ing] corporate governance powers as Liberty’s controlling stockholder and Chairman of the Board to, in effect, vacate the Board’s decision, reestablish himself as the de facto sole power at the Company and make it intolerable for anyone but the most loyal to serve on the Board or in senior management.”42 While the complaint against Liberty Tax does not track the language of a Caremark claim or explicitly allege a failure to monitor or oversee claim against the board of directors (most likely because the board fired Hewitt after an independent investigation two months prior), the plaintiffs do allege that several of the Hewitt-loyal individual directors breached their fiduciary duties by: 1) rendering the corporate governance of the Company “so dysfunctional that independent directors were unable to exercise their own respective fiduciary duties, causing them to resign” and 2) terminating the independent director recruitment process.43  

For instance, in DiNapoli v. Wynn, the New York State comptroller’s office along with several pension funds filed a derivative suit against Stephen Wynn and its board of directors and officers alleging that the board breached their fiduciary duties “based on a decades-long pattern of sexual abuse and harassment by Steve Wynn that remained unchecked, tacitly permitted, and eventually covered up by Defendants, resulting in a breach of their duty of loyalty and other fiduciary duties to stockholders.”38 The plaintiffs in this case track the language of a Caremark theory in their amended com-

Similarly, in Asbestos Workers’ Philadelphia Pension Fund v. Hewitt et al., a pension fund filed a derivative class-action against several directors and officers of Liberty Tax and its CEO, John Hewitt, stemming from Hewitt’s alleged widespread sexual harassment that was claimed to have irreparably damaged the company and caused it to pay out settle- Coming next month: Part II, which examines ments and enter into unfair transactions.41 recent and forthcoming legislation, as well In the complaint, plaintiffs allege that Mr. as tips for mitigating and managing risk. Hewitt breached his fiduciary duty by not only engaging in inappropriate sexual activity in the workplace and using company resources for his own “sexual gain,” but, af-

37  Id. 38  Amended Complaint, DiNapoli v. Wynn (Nev. D.C., Clark County Feb. 22, 2018), No. A-18-770013-B. 39  Id. at ¶ 131 (emphasis added). 40  For a more in depth analysis of the various claims a plaintiff may bring against a company and the implications of sexual harassment on corporate law, see the recent and insightful article by Daniel Hemel and Dorothy S. Lund in the Columbia Law Review. See Daniel Hemel and Dorothy S. Lund, Sexual Harassment and Corporate Law, Colum. L. Rev. (forthcoming 2018). 41  See Complaint, Asbestos Workers’ Philadelphia Pension Fund v. Hewitt et al. (Del. Ch. Dec. 11, 2017), No. 2017-0883, 2017 WL 6336021. 42  Amended Complaint, Asbestos Workers’ Philadelphia Pension Fund v. Hewitt et al. (Del. Ch. Apr. 17, 2018), No. 2017-0883. 43  Id.

Suit Limitations Provisions Tuesday, September 11 | 12 p.m. - 1 p.m. Environmental Coverage Issues Tuesday, September 18 | 12 p.m. - 1 p.m. You Break It You Buy It - Avoiding Self-Made Errors in Claims Handling in Florida Tuesday, October 16 | 12 p.m. - 1 p.m. Reading the digital version of Professional Liability Magazine? Click each webinar to register! 12 | PLM


TOP 5

Top 5 Running Destinations Along the Water you may find yourself thinking of a winning

3

argument to make on a motion, a key line of

includes part of the Miami Marathon course) or the Rickenbacker

Anthony J. Golowski II Besides being great exercise, running gives you time to organize your thoughts. During a run,

Miami Whether you choose the hard-packed sands of South Beach, the forgiving texture of the Miami Beach Board-

walk, or beautiful views from the Venetian Causeway (which

questioning for a deposition, or a critical clause to insert into a

Causeway, Miami offers tremendous opportunities for a water-

contract. Running outside is a great way to catch some rays, and

front run. A dip in the ocean is a great way to cool off afterward.

running near water may help beat the heat. With those thoughts

4

in mind, here is a list of great places across the country (and Goldberg Segalla’s geographic footprint) to go for a long run near the water:

1

New Jersey

Chicago Lakeshore Drive, which runs from Jackson Park to Foster Beach, is conveniently located near some of the top

attractions in the city, including the tourist and business districts in the Loop and the Magnificent Mile. A run along Lake Michigan

New Jersey has more than 120 miles of shoreline within

can be very energizing, especially if there are breezes coming off

easy distance of GS’s Princeton, Newark, and New York City

the lake. Toward the northern end of Lakeshore Drive, you can

offices, and miles and miles of boardwalk. Besides the pleasure

follow a part of the Chicago Marathon course.

of an oceanfront run, boardwalks provide a great running surface

5

(less impact and faster times than running on asphalt). Consider New Jersey’s longest boardwalk in Wildwood, or the famous Atlantic City boardwalk, which includes part of the course of the Atlantic City Marathon.

2

Philadelphia Kelly Drive runs along the Schuylkill River and attracts

Newport Beach, California The Newport Balboa Bike Trail provides a beachfront location to start your run, which can be extended with

sprints along nearby Newport Pier and Balboa Pier as well as Lido Isle and Lido Peninsula. Those looking for a longer run can seek the Upper Newport Back Nature Preserve, from which you can run along a portion of the Ocean County Marathon.  

runners, walkers, skaters, and cyclists. “Boathouse Row,”

with its 19th-century boathouses, is home to a number of the city’s university crew teams. A run along Boathouse Row follows part of the course of the Philadelphia Marathon. At the southern end of Kelly Drive, you can channel your inner Rocky Balboa and finish your run with a sprint up the Philadelphia Art Museum steps.

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August 2018 | 13


CASE NOTES

Not Easy in Massachusetts to Hold an Insurance Broker Liable Based on a “Special Relationship” With Its Insured Perreault v. AIS Affinity Agency of New England, Inc., (Appeals Court of Massachusetts, August 2, 2018) Court Cousins Plaintiff Perreault’s wife died from cancer in March 2006. He retained Simon Mann, an attorney, in September 2008 to represent him in a wrongful death action against tobacco companies for his wife’s death. Mann, however, did not investigate the merit of the wrongful death claim until after it expired in March 2009. In July 2009, he notified Perreault that he was terminating the representation, but withheld details about his untimely inquiry of the claim’s merit. Perreault sued Mann for legal malpractice and, in settling, Mann assigned to Perrault his rights against his malpractice insurer and its broker, AIS Affinity. Perreault sued AIS Affinity for failing to procure insurance coverage. The broker claims turned on whether a special relationship existed between Mann and AIS Affinity requiring the broker to make sure that Mann had adequate malpractice liability insurance for his work as a lawyer. The court explained that factors creating a special relationship include: (1) a prolonged business relationship, (2) the complexity and comprehensiveness of the customer’s coverages, (3) the frequency of contact between a customer and agent for the customer’s insurance needs, and (4) the extent to which a customer relies on the advice of the agent by reason of the complexity of the policies.

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Although the broker had worked with the law firms employing Mann going back to 2005, Mann’s contacts with the broker spanned only three years from 2007–09. The court also found that rather than rely on any advice from the broker, Mann actually departed from the broker’s suggestions on how best to maintain coverage. Moreover, the court found that the broker did not promise to provide any specific coverage, advise Mann concerning eligibility, or advise him regarding his insurance needs. Thus, no special relationship existed. IMPACT: Although often asserted, claims against insurance brokers based on a special relationship are difficult to win. Courts view the general purchase of insurance as simple business dealings rarely implicating a level of trust where the broker acts as a fiduciary of the insured. Exceptions may exist, however, where the broker holds herself out as an insurance specialist, consultant, or counselor and receives compensation from the insured for these services separately from any premiums paid.


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Our firm began with seven attorneys, one vision, and enough spare wood and sawhorses to build the makeshift desks where the firm was born. Today, Goldberg Segalla is an AmLaw 200 firm ­— and one of the fastest organically growing law firms headquartered in the U.S., with nearly 400 accomplished attorneys practicing at the forefront of a wide range of fields, from commercial litigation and transactions to employment and labor, construction, cybersecurity, professional liability, retail, sports and entertainment, and more. Most importantly, we’ve never wavered in our commitment to our founding principles of collaboration, professionalism, diversity, and creative client-driven service.

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www.goldbergsegalla.com © 2018 Goldberg Segalla. Attorney advertising. The contents of this document are for general informational purposes only. Nothing in this document constitutes legal advice or gives rise to an attorney-client relationship. Readers should not act upon this information without seeking professional counsel.

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Professional Liability Magazine - August 2018  

Goldberg Segalla’s Management and Professional Liability Practice Group leads the way for analysis and discussion of the trends, decisions,...

Professional Liability Magazine - August 2018  

Goldberg Segalla’s Management and Professional Liability Practice Group leads the way for analysis and discussion of the trends, decisions,...

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