Employers nationwide have embraced diversity and inclusion goals and have made important strides toward ensuring their management teams and boards include people of different races, ethnicities, and genders. While the increased focus on diversity and inclusion constitutes progress, this progress has besought an unintended consequence: a spate of shareholder derivative lawsuits alleging that companies fail to live up to their diversity and inclusion claims. While these lawsuits have thus far been dismissed, they provide a cautionary tale for companies who fail to back up their claims of diversity with appropriate action.
Shareholder ESG Lawsuits
In recent years, public companies have been under increasing pressure to establish and disclose their environmental, social, and governance (ESG) goals and their progress toward meeting those goals. Certain ESG categories proved to be fertile ground for shareholder derivative lawsuits, with plaintiffs enjoying some success in litigation regarding company conduct related to climate change and sexual harassment. ESG-related actions spurred copycat lawsuits and, in some cases, led to settlements of $100 million or more.
Starting in mid-2020, when companies began to promote their diversity and inclusion goals and efforts, the plaintiff’s bar took notice. Shareholder lawsuits cropped up against several large companies, such as Facebook, Oracle, NortonLifeLock, and The Gap, and their officers and directors. These suits allege that these companies failed to follow through with the diversity and inclusion claims made in their proxy statements, corporate responsibility reports, websites and other communications, and that the companies suffered reputational harm, loss of goodwill or other losses as a result. In addition to seeking compensatory damages, shareholders have also sought a number of unique remedies with an eye toward effecting change. These remedies include replacement of specific board members or the filling of a certain percentage of positions with members of certain demographics. While laudable goals, the diversity and inclusion statements made by companies are generally too broad to lend themselves to lawsuits and have ended in dismissal, including a recent finding in favor of Qualcomm Inc.
Qualcomm Lawsuit Dismissed
In November 2021, a shareholder derivative suit filed by Qualcomm Inc. stockholders was dismissed in the U.S. District Court for the District of Delaware. The stockholders alleged that the company’s 2019 and 2020 proxy statements included materially false statements and misleading omissions regarding the company’s commitment to diversity. The court rejected these allegations, ruling that the statements were either inactionable puffery or that the complaint lacked any material facts to support a reasonable inference that the statements were false or misleading.
For instance, the plaintiffs claimed the following statement from the 2019 proxy was materially false and misleading: “The Governance Committee’s goal is to assemble a board of directors that brings to us a diversity of perspectives and skills.” The court, however, held the statement was not actionable because it was not material. “A statement is not material if it involves…opinions, motives and intentions, or general statements of optimism,” the court said. “Statements about a company’s or board’s goals are inactionable puffery, as many courts have found.”
The shareholders also claimed the statement “The Governance Committee will include, and instruct any search firm it engages to include, women and ethnically/racially diverse candidates in its pool from which the Governance Committee selects director nominees” was false and misleading because Qualcomm has no Black board members, and no Black or other minority candidates had been elected to the Qualcomm board over the previous six years. The court ruled, however, that just because no minority candidate had been named to the board does not mean the governance committee did not include or instruct its search firms to include diverse candidates in its pool of candidates. “It could simply mean that those candidates did not advance past the larger candidate pool,” the court said. The plaintiffs “failed to allege any facts supporting a reasonable inference that [the statement] was false or misleading.”
Given the repeated dismissals of diversity-related actions, it’s likely this litigation trend will die down as quickly as it appeared, with the plaintiff’s bar gravitating toward more lucrative categories. While the trend may be losing steam, it is nonetheless important for companies to be careful about what they publish in their disclosures and how they track progress toward achieving their stated diversity and inclusion goals. The more specific the claim, the more important it is to make sure it is supported by actions and outcomes. If a company says it promotes diversity and inclusion, it should also walk the walk.
Novack and Macey LLP is a commercial and business litigation law firm that represents companies, entrepreneurs and other parties in disputes arising out of business relationships and commercial transactions. The author, Rebekah H. Parker, is Chair of the firm’s Diversity, Equity, and Inclusion Group. She can be reached at firstname.lastname@example.org or call 312.419.6900.