June 1999

On June 22, 1999, the U.S. Supreme Court ruled that a plaintiff who proves intentional discrimination may collect punitive damages without showing egregious conduct by the employer. At the same time, the Supreme Court provided certain employers with a significant defense to punitive damages awards. The Supreme Court held that an employer may not be liable for punitive damages for discriminatory employment decisions of managers where those decisions are contrary to the employer's good faith efforts to comply with employment discrimination statutes. In order to take advantage of the defense, employers must show good faith compliance efforts. For example, the Court encouraged employers to create and implement broad anti-discrimination programs, including strong policies and continued training and education of employees.

In Kolstad v. American Dental Association, the Supreme Court was asked to decide whether a woman alleging sex discrimination under Title VII was required to show that her employer's conduct was egregious in order to collect punitive damages under the Civil Rights Act of 1991. That Act (sometimes referred to as "Section 1981a") provided plaintiffs alleging discrimination under Title VII or the Americans with Disabilities Act with additional rights and remedies, including the right to a jury trial and the right to recover compensatory and punitive damages. Section 1981a limits the availability of punitive damages to cases of intentional discrimination where the plaintiff demonstrates "malice" or "reckless indifference" by the employer.

In the case before the Court, Carole Kolstad alleged that her employer's selection of a male for an open position instead of her was due to sex discrimination. Kolstad prevailed at trial and was awarded back pay by a jury. However, her request that the jury be permitted to consider an award of punitive damages was denied by the judge who ruled that Kolstad was not entitled to punitive damages because she had not established that the employer's conduct was egregious. Kolstad appealed this ruling, which the appeals court affirmed.

The Supreme Court disagreed with the lower courts. It held that the standard for the availability of punitive damages under Section 1981a requires an examination of the state of mind of the employer, rather than an assessment of the egregious character of the conduct. Thus, the plaintiff need only prove that the employer had knowledge that its actions may violate federal law to be eligible for punitive damages. The Supreme Court outlined limited examples of situations in which an employer may escape liability under this standard. An employer would not be liable for punitive damages where, for example, the plaintiff's theory of discrimination is novel or the employer reasonably believes that it has a bona fide occupation qualification or other defense to the alleged discrimination. Egregious conduct, according to the Court, may serve as evidence of the employer's malicious or reckless state of mind, but it is not a required showing to make punitive damages available. As a result, when discrimination is found, an award of punitive damages may be more likely under this ruling.

More significantly, however, the Supreme Court majority held that punitive damages are not automatically available upon a demonstration of malice or reckless indifference. It stated, over strong dissent, that the legal principles under which an employer may be held vicariously or indirectly liable for actions of its managers are not without limits. The Court rejected the notion that an employer is always responsible for punitive damages, even if a manager acting within the scope of his or her employment knows that his or her actions may violate federal anti-discrimination laws, because punitive damages ordinarily are not available against those who are only indirectly liable.

Building on the road map which it provided to employers in last summer's sexual harassment decisions, the Supreme Court held that employers may avoid liability for punitive damages when they engage in good faith efforts to comply with Title VII, despite a manager's acts to the contrary. According to the Court, an employer who shows good faith compliance efforts cannot be in reckless disregard of federally protected rights. Like the sexual harassment decisions suggesting that employers adopt policies and programs which are effective in preventing and correcting sexually harassing behaviors, the Kolstad opinion encourages prudent employers to expand such programs to include all forms of unlawful discrimination. In light of the Supreme Court's direction, employers may wish to implement the following compliance measures in order to attempt to shield them from punitive damages awards:

  • promulgate broad, effective anti-discrimination policies, covering all forms of discrimination prohibited by federal, state and/or local law;
  • disseminate the anti-discrimination policies broadly and regularly;
  • implement widespread training and education of personnel to ensure understanding of the breadth and importance of the policies;
  • create or expand complaint procedures designed to handle effectively all discrimination claims; and
  • take remedial action promptly to address and correct policy violations, including imposing discipline on managers who disregard policies.

The text of Kolstad v. American Dental Association, No. 98-208, can be found at http://supct.law.cornell.edu/supct, which is also available through links on the Morgan Lewis website at http://www.mlb.com by selecting Library, General Legal Resources.

Should you have any questions about this opinion or techniques which your company may wish to implement to take maximum advantage of the defense offered by the Supreme Court, do not hesitate to contact the attorneys identified below or any other member of the Labor and Employment Law Section of the firm.

 

Jane Howard-Martin

Christopher Ramsey

This article is published to inform clients and friends of Morgan Lewis and should not be construed as providing advice on any specific matter.