Avoiding Punitive Damages: Training is the Key

Even where an employer has the misfortune of being held liable for discriminatory or harassing conduct of its supervisors, the company nonetheless may be able to avoid punitive damages by showing that it engaged in good-faith efforts to prevent such conduct. In order to avail itself of this defense, however, an employer must show not only that it maintained an anti-discrimination and anti-harassment policy, but that the company effectively implemented that policy through training its supervisors and employees.

This defense derives from the 1999 landmark decision of the United States Supreme Court, Kolstad v. American Dental Association, in which the Court held that punitive damages may be imposed in Title VII cases in which a supervisor engaged in intentional discrimination while acting within the scope of his or her employment and in the face of a perceived risk that the actions would violate federal law. The Court also held, however, that where an employer shows that it engaged in "good-faith efforts" to comply with Title VII, it will not be vicariously liable for punitive damages based on the discriminatory acts of its supervisors.

In the wake of federal and state cases that have applied Kolstad either directly or indirectly, one theme has clearly emerged: the mere maintenance of anti-discrimination and anti-harassment policies is insufficient to demonstrate "good-faith efforts." Rather, training is a necessity for any employer hoping to establish its good faith efforts so as to escape punitive damages.

Of the eleven Federal Circuit Courts of Appeals, eight have rendered decisions applying the Kolstad analysis, and all have focused on whether the employer effectively implemented its policies through training and education. The First Circuit Court of Appeals — covering Massachusetts, Maine, New Hampshire, Rhode Island and Puerto Rico — has issued a few decisions involving the Kolstad defense, two of which demonstrate that training can result in savings of several hundreds of thousands of dollars for employers.

In Marcano-Rivera v. Pueblo International, the First Circuit Court of Appeals relied on Kolstad to affirm the trial court’s refusal to allow the jury to even consider punitive damages. Although the jury awarded compensatory damages in the amount of $225,000 for the plaintiff’s claims of disability discrimination under the Americans with Disabilities Act, she appealed in an attempt to garner punitive damages. The First Circuit rejected the appeal, finding ample evidence that Pueblo "trained its personnel to ensure equal treatment of employees with disabilities," thereby allowing Pueblo to limit its exposure to only compensatory damages.

Applying the same Kolstad analysis in another case decided within months of Marcano-Rivera, the First Circuit reached an opposite conclusion. After a trial on the plaintiff’s sex discrimination claims in Romano v. U-Haul International, the jury awarded a mere $15,000 in nominal damages, but saddled the employer with $625,000 in punitive damages, which the district court then reduced to $285,000. On U-Haul’s appeal of the punitive damages award, the First Circuit focused on the company’s alleged good-faith efforts to comply with Title VII.

Echoing other Courts of Appeals, the First Circuit stated that while a written non-discrimination policy serves as one indication of an employer’s good-faith efforts, a "written statement, without more, is insufficient to insulate an employer from punitive damages liability." Rather, an employer "must" show efforts to implement its policy "through education of its employees and active enforcement of its mandate." The Court noted that U-Haul had taken steps beyond its written policy, including advising its managers and supervisors that gender could not be considered in termination and hiring decisions. Nevertheless, the Court upheld the punitive damages award because U-Haul had neither conducted supervisor training nor educated its employees on the policies.

The First Circuit’s mandate that, in cases in which punitive damages are available, an employer must have conducted anti-discrimination training in order to avoid such damages, is reflected by the other seven Courts of Appeals that have addressed this issue. Moreover, the Kolstad "good faith efforts" defense is similar to the standard under the Age Discrimination in Employment Act (ADEA) to avoid liquidated damages for a willful violation of ADEA. For example, in Mathis v. Phillips Chevrolet, the Seventh Circuit Court of Appeals reached a Kolstad-like result when it upheld the jury’s award of liquidated damages based on the failure of the employer to train its managers about the ADEA.

Although Kolstad technically applies only to certain federal anti-discrimination laws, several states have recognized, whether formally or informally, some form of this defense in cases involving their state anti-discrimination laws. Of great importance is that some of those states are those that hold employers strictly liable for discriminatory conduct of supervisors — in other words, states that do not permit employers to assert the Faragher-Ellerth defense discussed on page 2 of this Labor & Employment Issue, to avoid all liability for supervisors’ harassing conduct. In these "strict liability" states (which currently include Massachusetts and California), an employer’s ability to escape punitive damages by demonstrating that it trained its workforce is crucial to limit overall liability.